Aluminium last week powered up through the $2,800 level for a Friday close at $2,818, basis 3-month metal, with CTA systematic funds covering back short positions and LME options market-makers nervously eyeing their December exposure amid a tightening nearby market structure.
And if those words bring a strong sense of déjà vu to the reader, you're not alone. We wrote something very similar a couple of months ago, when aluminium was first powering its way back up towards the $2,800 level over the course of October.
Since then, of course, the market has slumped all the way back to $2,600 and below with technical sellers emboldened by a lacklustre performance from pack-leader copper and the dissipation of that much-talked-about tightness on the December date.
Patience
But as one of the London locals put it in his daily report last week: the word on the London "street" is that the dominant long around the December date is "patient".
That patience is being rewarded. Friday brought a flare-out in the nearby market tightness with "tom-next"—the shortest-dated of all LME spreads and a good indicator of pressure on the cash date—trading at $5 backwardation.
The Dec-Jan spread, which at its peak in late October was valued at $27.50 backwardation, was valued last Thursday at $10 contango. Come Friday, though, it shifted suddenly back into $2 backwardation at the closing valuation with the tightness spilling across the whole of the first quarter next year.
The dramatic turnaround comes with the appearance of a dominant long position-holder in the LME's daily market reports. As of Thursday, Nov 30 (the reports are back-dated by two days) one player held cash and warrant positions equivalent to 50-80% of all active warrants (i.e. LME open tonnage).
The inferred position is equivalent to 325,000-350,000t and, according to the scuttle on the London "street", is right now concentrated in cash positions and being rolled forward. Things could get a little hairy in the next day or two if that positions moves to "tom" or delivery.
There has already been a reaction from the technical shorts. Indeed, much of the recovery in price since Nov 17's low close at $2,625 has been fuelled by these players buying back. Our fund-watching sources suggest the CTA systematic fund community alone has reduced its short exposure from over 20% of capacity to just 6% as of Friday.
Game On!
Wednesday is LME options declaration date and with the price now above $2,800 and all sorts of fun and games potentially in the offing on the nearby dates, there will be a few nervous options shorts out there.
This is a chart of the potential options pain. As has been the case for some now, there are significant call options open on both the $2,700 and $2,800 strikes—both currently "in the money"—but the big concentration remains on the $3,000 strike.
Right now it seems unlikely the price will get there in time to bring open interest here—9,712 lots of it, equivalent to 242,800t—into play but then it seemed
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