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October sugar managed to push to a new high for the move yesterday while July stayed inside of the recent trading range. Outside market forces were supportive but the market now faces a more significant test. Outside market influences are negative for today and while the longer-term fundamentals are positive, the short-term overbought technical condition and weak ethanol prices in Brazil may help spark a more significant correction. October sugar closed sharply higher on the session yesterday and managed to push to a new contract high. Talk of another world production deficit for the 2009/10 season and ideas that higher energy prices could spark better demand for Brazilian ethanol helped to support the rally. Bulls are a bit concerned with the overbought technical condition of the market basis traditional technical indicators and basis the recent Commitment-of-Traders report. The non-commercial trader (funds) net long position of 212,738 contracts is approaching the record of 216,497 contracts reached in March of 2008. Open interest in sugar jumped to 760,881 contracts from 753,833 contracts previous from near 650,000 in late April and from near 608,000 at the March lows. The surge in open interest has helped support the strong gains but the market seems vulnerable to a correction if energy markets set back or investors have second thoughts about holding commodity markets. The credit crunch has kept Brazil ethanol producers in a selling position as they pushed for an early harvest to generate cash flow and now do not have the money to store the ethanol and wait for better prices. As a result, ethanol prices seem to be holding at a lower level. At the same time, sugar prices have seen the benefit of strong fund buying, a weaker dollar and trade house forecasts for a world production deficit in sugar for the 08/09 season and the 09/10 season. Traders believe that India should be able to produce near 20 million tonnes next season, up 5-6 million from this season but still shy of consumption. The USDA attache last month indicated that India may still need to import 2.5 million tonnes for next year.
TODAY’S GUIDANCE: Attracting new buyers after the recent surge in open interest may be a difficult task without help from outside market forces. This leaves the market in an extreme overbought condition and vulnerable to a set-back. The short-term objective for October sugar is at 17.11 and this may be seen as resistance with 16.96 as closer-in psychological resistance. Support is back at 15.85 and 15.46.
