Aluminium trading in London continues to be accompanied by the sound of collective head-scratching with the light metal stubbornly refusing to conform to expectations. All eyes last week were on Wednesday's options declaration and its huge concentration of open interest on the $3,000 calls. In the event the market never got there but the collective sigh of relief among market-makers gave way to fresh bafflement as the nearby market structure re-tightened and 3-month metal bounced straight back to tackle again resistance.
Options Miss
The rally in 3-month aluminium from the September lows down at $2,405 to $2,818 at the previous Friday's close has been well documented. The two key drivers of the rally was collective short-covering from the CTA fund community and then delta-hedge covering by LME options market makers with one eye on the fearful accumulation of open interest on the $3,000 strike.
In the way stood technical resistance at $2,850/60—representing a 50% retracement of the fall to those September lows—around which producer sellers had rallied the flag.
Aluminium pressed its nose against the resistance level several times on Tuesday but couldn't break free, even with one of those "surprise" mass warrant cancellations that shouldn't really surprise anyone with a long memory of this market.
In the event Wednesday morning's options declaration came and went with barely a whimper with the overhang of $3,000 calls never in danger of being hit.
For a bit everything then went as would be expected. The nearby spreads flipped back into contango—cash-3s ended the day valued at $7 contango—and the 3-month price retraced all the way back to $2,780 at the close.
It footled around there Thursday morning, looking a little bit depleted after the failure to get where most thought it was heading on Wednesday—the $3,000 level. But as one local then summed up the afternoon's activity: "The big question is: what happened to aluminium?"
Ignoring weakness in the likes of copper and zinc, the light metal rallied strongly to $2,825 for a close at $2,817. Just in case we thought it was a trick of the light, it sustained its strength through Friday to nudge again that $2,850 level and close at $2,825—a small weekly gain of $7 but one that wasn't expected given the miss on the options date. Even less expected was the further tightening of the cash-3s period, which ended valued at $11 backwardation.
Game Still On?
All of which seems to suggest that the big boys' games around the front part of the curve are far from over.
Certainly, the most recent LME report for Dec 7 (these reports are always back-dated by two trading days) shows the dominant long position-holder still sitting pretty with 50-80% of warrants, cash and tom positions relative to open warrants in the LME system.
Our sense is that there has also been a lot of position re-structuring over Q1 2007 with the spreads very active and quite volatile in recent days as major players re-adjust their expectations for metal availability through the first months of next year.
The CTA systematic fund community, who have been the cannon-fodder for this market's recent moves, have now shifted back from collective short to marginal long exposure and a break of $2,850/60 is widely expected to bring them back in greater numbers on the long side.
The producer line in the sand there has held well so far, but aluminium has not recently performed to its given script and we and many others are wary that there is more unpredictability to come, particularly with that dominant long showing no signs of going away for now.
Things are further confused by the dislocation in the physical market place. The surge in European duty-paid premiums has spent its immediate force with quoted indications easing back below the $200 per tonne over LME cash level at least partly in response to the anticipated cut in the duty in January—althoug
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