In Dry Bulk Market,International Shipping News 24/10/2016
Historically if you were a stock trader pre-internet days, you would look at the currency markets, then the bond markets and finally the stock index, before trading your individual stock. 30 years later, trading and news vendors can hugely simplify this process, allowing traders to make real time decisions. Commodity traders can benefit hugely by looking down stream to help define market moves that they are expecting in the near future. Ironically, for stock trader’s lags between currencies, bonds and stocks is now minimal, closing out the traditional leading indicators for the market.
From a commodity perspective, the freight Dry bulk derivatives market is very reliant on the physical market for direction, port loadings in Brazil for example are a big factor to the short term supply and demand in the dry bulk market. Fuel oil is another major factor, what happens in the Crude oil market is a huge driver to the freight market, as bunkering can be up to 40% of the voyage rate. If crude oil makes a sustained move, the probability that the freight market will follow increases. So how can a freight trader take advantage of this, are there indicators that would give clues to where the crude oil market is going?
One obvious thing to look at is the open interest and volume. Increasing open interest and volume on a rising market would suggest that money flow is entering the market, indicating that any downward swing in the freight market could soon find support. Another very useful indicator to follow which is of the same vain, is the Commitment of trader’s report that is issued by the Commodity Futures Trading Commission. Knowing how the ‘Commercial and non-commercial trader’s’ are positioned in the oil market can be very insightful further upstream for the freight trader who is looking at the dry bulk sector, and wondering how relevant the current market supports are.
We know momentum indicators can be useful to trade freight, but the high volatility can often push, and keep these shorter term indicators to the extreme. This means that they can be less effective when trying to define shorter term support and resistance levels, and whether they will hold. The Capesize market has been in decline for a number of days now. The longer term momentum (weekly chart) is bearish. But for a freight trader that is looking for opportunities to buy futures, the question is, are we going to find market support at US$ 8,070, and will this be a safe point of entry? As this is a support level from the low on the 14/9/16, as well as a Fibonacci support level. Daily momentum indicators are at their extreme, so the market technician knows that momentum is overdone, but he also knows that this extreme illustrates a trending environment.
However, if he looks downstream to the oil market he will see that open interest is rising fast, however in a consolidating market (rather than a trending market) how can he be sure that the market is not going short? By looking at the ‘Commitment of traders’ report, the freight trader can see that the commercial market (hedgers) and non-commercial (Large speculators) are long oil. This would suggest that a well-supported crude market equates to potentially higher fuel oil prices, which in turn could act as support to the freight market. Knowing the directional play in the Crude market has another benefit to the freight trader. Any subsequent sell off in the oil market could be exaggerated by the exit of long positions, and alert the freight trader to the possibility that the support in the freight market could vanish.
Source: Freight Investor Services (FIS)
