the trade you hate
market vibes
June 24…
Before we get started this morning, a few words on reading the front spread and the forward curves in oil, gold and commodities. Nothing deep … just a basic way of holding a wet finger to the wind.
The front spread in oil is primarily influenced by refiner demand and relative levels of inventories, in that order. When refiners schedule runs to meet product demand they lift barrels hedged in inventory at whatever price the market offers because those barrels are already sold for a profit downstream. That is the crack spread or their margin of profit.
If there is a shortage of oil per se, the front spread is the pebble in the water from which all other oil pricing is derived. If we had a shortage of oil today, the front spread would be trading $10.00 not $0.55 cents (!!) and… this is just wow… it’s worth $0.55 cents when capacity utilization in PADD 3 is 95% to 98%. When demand for crude is high and the front spread is flat… inventory surveys are irrelevant…supply is greater than demand.
Almost all other commodities have a negative carry or contango especially metals because they are non-perishable, vaulted or warehoused at fixed storage and insurance costs and equivalent opportunity costs or risk-free interest.
Grains and softs spreads are the worst indicators with the most variable convergence to futures because they are perishable. I started trading potato futures on the old merc before I went to gold so I know a bit about perishable commodities!
The forward/forward curves today are mostly credit related, lease rates, project finance funding and long-term hedges. Don’t even think about them. Your job is to understand the front 3 months and the EFPs (exchange of futures for physicals). The rest of the curves are not for speculating unless you are in the game and making prices, not taking them.
in the news
The DOE reports on petroleum inventories and other industry data is at 10:30. I suggest watching PADD 3 cap utilization, products supplied (domestic demand proxy), exports of crude and products separately on one hand …and production and imports on the other. There’s a lot of other stuff going on regionally and around the world but this is the meat in the DOE sandwich.
In finance, Alphabet joins the Dow, replacing Verizon and ranking 9th in the price-weighted 30-stock index. Alphabet is listed in the S&P 500 and NDX 100 as well and… Because it’s worth $3 trillion, it’s one of the most influential companies in both indexes. When a dollar goes into Dow index replication and other total return swaps a relative percent of it will go to each of the 30 stocks based on their weighting. Bullish for Alphabet.
According to ESPN… “Coming into the tournament, analysts gave the U.S. men’s national team a 53% chance of reaching the round of 16. Just two games in, that number is up to 84% … by far the largest increase for any team in the field. Not too shabby!
USA vs TRY Thursday at 10:00 PM EDT on FOX…”
in the markets …things get interesting in gold and silver
