Aluminium market under long liquidation, open interest drops 7.15%

Aluminium settled down -1.2% at 119.25 after US economic data were mixed overnight. Initial jobless claims and the Conference Board Leading Economic Index were positive. But Markit’s service PMI and Philadelphia Fed’s manufacturing index missed forecasts. A firm dollar and falling crude oil prices dampened market sentiment. In this context, LME aluminum fell back to USD 1,902/mt after rising slightly, and ended at USD 1,911/mt. While the contango in the aluminium forward curve has edged higher in recent weeks after nearly moving into backwardation last month.

The contango in the 27-month aluminium forward is now USc5/lb, while the contango in the 15-month aluminium forward is now USc3.5/lb. A contango forms in commodity forward curves when there is a surplus in the underlying commodity. This has been the case in aluminium markets, as seen through the rise of LME inventories to ~5.5Mt from early 2009 to late 2013. The contango in the aluminium forward curve is the major driver of inventory financing in the metal. In this trade, investors use an upward sloping aluminium forward curve to lock in profits by purchasing aluminium in the near term and selling it later.

The trade benefits investors through a risk-free return and LME warehouse operators through rent, with the latter incentive leading to the long waiting times for the delivery of aluminium. These queues have led to aluminium premiums jumping to record highs. However, a key risk next year is whether the aluminium forward curve moves into backwardation due to the forecast global deficit. Technically market is under long liquidation as market has witnessed drop in open interest by -7.15%, now Aluminium is getting support at 118.5 and below same could see a test of 117.6 level, and resistance is now likely to be seen at 120.5, a move above could see prices testing121.6.

Trading Ideas:
--Aluminium trading range for the day is 117.6-121.6.
--Aluminium prices ended lower as pressure seen as a firm dollar and falling crude oil prices dampened market sentiment.
--The CB reported that its Leading Economic Index rose 0.6% in November, promising a steady expansion in US economy in coming few months.
--Aluminium daily stocks at Shanghai exchange came down by 2475 tonnes.