Last month we noted the new commercial net short record crude oil position. Since then commercial traders set a new record total of almost two million contracts. This eclipses the previous record set in 2007. Correspondingly, the record speculative long position has been cited in many places. The speculators are net long 4.5 contracts for every short position. This is the highest it has been since they reached 6.2:1 at crude’s last high in June 2014. This leaves the speculators vulnerable to a pullback in prices. 

The commercial traders have been selling forward crude production while buying crude oil’s refined products: gas and heating oil. Petroleum companies are value players who expect the price of crude oil to fall more than the sum of its products. The commercial traders’ application of hedging strategies helps limit their risk while waiting for the speculators to give up and be washed out.

Cotton & Grains 

We discussed the cotton market in the January issue noting the record producer selling in both pace and total quantity, further stating that cotton producers clearly see anything over 70¢ per pound as a bonus. Cotton is now trading 10% higher, and the speculators have set net long position and total position records. They now hold more than seven long contracts for every short contract. The last time the speculative position was this one-sided was late January of 2004. Cotton fell by nearly 50% in the following six months. 

Barring an unexpected weather event, cotton should run out of speculative buyers and fall. The U.S. Department of Agriculture anticipates a larger U.S. crop and increased global stocks. The increase in commercial selling with each rise in price indicates producers’ growing desire to short hedge their physical deliveries at the current price above 77¢. Macro evidence reinforces this as China is selling off stockpiles built to support domestic price floors with little worry of meeting their forward domestic and manufacturing needs.

Last month, we discussed soybeans, but we should’ve started with corn, as it is typically the first of the major U.S. crops to peak. The grain markets move based on whether the upcoming growing season will be normal versus abnormal. Tension builds through spring planting and begins to ease as the crop takes hold. The market breathes a sigh of relief, and the slow grind lower begins. The corn market should be nearing this peak around April 1. 

We see $4.15 per bushel as the magic number if this is a normal year. Corn producers are faced with increasingly tougher decisions in selling the coming year’s anticipated production because the same modern agricultural technology that helps ensure a bountiful crop also depresses prices by cultivating processor complacency. This year is likely to be a balancing year based on current stockpiles, which suggests betting on a normal year. The National Oceanic and Atmospheric Administration’s (NOAA) long lead forecast reinforces the normal year projection. NOAA is calling for perfect weather through much of the breadbasket this spring. Therefore, patiently sell the emergence rally and stay short. We’ll know the year has become abnormal if the corn processors and ethanol blenders start locking in future deliveries at higher prices as they begin to anticipate prices getting away from them down the line.