From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
As we approach year-end, we're diving into the individual commodity groups to gauge the status of the primary trends and to get a better idea of where we’re likely headed in 2022.
Last week, we highlighted precious metals -- by far the worst performers of 2021 with a -10.59% return thus far. We think there's a good chance they'll turn things around next year and start participating.
Today, we’re going to review the other end of the spectrum in terms of performance -- energy!
While base metals and ags have posted strong gains over the trailing 12-months -- 25.96% and 28.22% respectively -- energy has been the real leader, quietly printing a 46.33% gain despite recent selling pressure.
After crude oil collapsed below zero last year, the entire group had its work cut out. But they’ve covered an amazing amount of ground in a short period of time, and we think they have further to go.
Let’s take a look at what’s happening in this leadership group and how we want to position ourselves as we head into the new year.
First up is crude oil:
Following a rough bout of volatility in early 2020, the price of crude oil rocketed higher and hasn’t looked back since. A few months ago, crude reclaimed its 2018 highs but wasn’t able to sustain the move. Crude is still up more than 56% over the trailing 12 months, and the primary trend remains intact.
Rather than focus on the failed breakout at the 2018 highs, we want to give crude the benefit of the doubt here, as we’re in a very strong primary uptrend. Those new multi-year highs were likely a false start, and we think price will eventually make a sustained breakout from this massive base.
As long as crude oil holds above its summer lows around 61.75 our structural outlook is bullish.
The rest of the energy space has been very strong as well, supporting our bullish bias. Let’s take a look at some of the other contracts now.
Brent crude oil futures still haven’t managed to break out above its former 2018 highs:
This might be the cleanest expression of overhead supply among energy contracts, as most have attempted and failed to hold their respective breakouts from earlier this fall.
There’s no cause for alarm as long as Brent holds above its summer lows around 64.80. We think this base eventually resolves higher.
On the other hand, if it continues to slip lower into its multi-year range, we have to step back and question our bullish thesis for commodities and cyclical value stocks. As long as we keep chopping sideways in this range, this is just a continuation pattern within the context of a primary uptrend.
Next we have RBOB gasoline futures:
Crude oil derivatives all paint a similar picture: failed breakouts in the fall followed by swift moves back within their prior ranges. Though RBOB gasoline failed to hold above the breakout level, buyers recently defended the summer lows around 1.872. This is constructive.
We’ve yet to see any meaningful downside follow-through after the failed breakout. That’s a point for the bulls. As long as demand continues to slowly digest overhead supply around its former 2018 highs, it’s hard to be bearish.
Gasoline futures continuing to churn at these levels would be perfectly normal.
The same can be said of heating oil futures:
After two months of corrective action following a failed breakout in October, heating oil is lingering just below those 2018 highs. As long as heating oil is above its August low around 1.897 there's no cause for concern.
Let's round things out with a chart of natural gas:
In true natural gas fashion, we witnessed a “face ripper” of a move earlier in the year. But price has since collapsed. And if we’re talking about futures markets over in Europe, nat gas is still ripping!
But, for the purposes of this post, we want to focus on the US contracts and the overwhelming overhead supply across the energy space.
That’s really what it all comes down to: These energy contracts continue to digest overhead supply after an explosive run to the upside. They’re running into resistance at logical levels as they continue to carve out multi-year bases. In the case of natural gas, this is a decade-long base.
If and when these massive bases finally resolve higher, we’re expecting another strong leg to the upside for the whole space. It’s a common theme across asset classes -- and the defining story of 2021 after the historic rally off the 2020 lows. Most risk assets are simply consolidating in holding patterns within the context of strong uptrends.
Like much of the market, energy requires patience. If crude oil and the other energy commodities can reclaim their respective 2018 highs, we have to imagine that the commodity supercycle and cyclical assets will be back in full swing.
COT Heatmap Highlights
Due to the Christmas Holiday the COT data is from the previous week as of December 14, 2021.
Australian Dollar: Commercials' long positioning is still near historical extremes.
Coffee: Commercial hedgers remain net short, bordering on a three-year record, but have slightly lightened their short exposure.
Palladium: Commercials are the most net long in history.
US Dollar Index: Commercial hedgers dropped their net short position by more than 3,000 contracts last week.
