Fundamentals

Daily Commodities Fundamentals: Commodities Extend Yesterday’s Losses Into Today

North American Commodity Update, Last Updated 9/23/2009 5:45 PM EST (GMT = EDT +5:00)

Commodities – Energy

Crude Prices Fall Sharply Again

Crude Oil (WTI)   $65.89                               -$3.08        -4.47%
Crude oil fell hard for the second consecutive day as the dollar continued to show strength and sales of existing U.S. homes unexpectedly slumped in the month of August.  Existing home sales, expected to rise 2.1 percent on the month, in fact fell 2.7 percent to a 5.1 million annual rate.  Investors became concerned over the strength and speed of the economic recovery and fled risky assets for the safety of U.S. dollars and Treasury debt.  The downward pressure on oil the past two days has also been fundamentally driven, as inventories are outpacing demand.  The DOE report yesterday showed a significant increase in crude, gasoline, and distillate inventories.  On the demand side, oil consumption will drop 1.9 million barrels a day this year and demand for gasoline has fallen to its lowest amount since January.  Today’s move in oil was a significant one from a technical perspective as oil had been trading between $68 and $75 per barrel since early August.  Going forward, fundamentals should help drive oil prices in addition to the U.S. dollar.

Commodities – Metals

Precious Metals Continue to Struggle on Dollar Strength

Gold                   $997.60                           -$15.50                              -1.53%
Gold closed below $1,000 an ounce for the first time in two weeks on U.S. dollar strength as well as the expiration of futures options which created additional selling pressure.  The U.S. Dollar Index rose 1.1% to 76.88, its highest close in two weeks, reducing the appeal of gold as an alternative investment.  The decline in the December gold contract, was the biggest decline for a most- active gold contract since July 8.  Going forward, gold will be closely linked to the dollar and will be greatly impacted by the Federal Reserve’s exit strategy from the current levels of economic stimulus.  If the Fed can withdraw economic stimulus without stoking inflation fears, that would hurt the gold price as the commodity is often used as a hedge against inflation.  However, here remain bullish fundamentals for the price of gold as the Fed’s decision to maintain low rates could continue to put downward pressure the dollar going forward.

Silver                 $16.273                   -$0.61                               -3.64%
Silver prices closed significantly lower today on dollar strength as well as falling equities.  The S&P 500 declined 10 points (0.95 percent) to 1050 as weak housing data concerned investors over the strength of the economic recovery.  It is likely that silver reached overbought levels and was due for a correction after it rallied by more than four dollars per ounce in the past month.  In the long-term, however, silver may move further to the upside as the world’s economic outlook improves.

Written by James Russell, CFDTrading Research
Questions/Comments about this article? Send them to JRussell@fxcm.com