Fundamentals, Oil & Gold

Crude Oil Unwinds Early Gains as OPEC President Warns of Potential Production Increase

Commodities – Energy

Crude Oil Unwinds Early Gains as OPEC President Warns of Potential Production Increase

Crude Oil (WTI) -  $80.05  //  -$0.45  //  -0.56%

Crude is attempting once again to reverse its most consistent and aggressive bull trends since early June. Volatility was stoked through the morning with a hearty round of asset-specific event risk as well as a notable turn in underlying sentiment. The lower boundary on the steady, rising trend channel that began back on October 8th (or it could be argued back on September 25th) was overrun this morning concurrent with the Dow Jones Industrial Average’s tumble to its lowest levels since the 14th and the dollar’s biggest rally since August 7th. Investor confidence may just now be easing; but the fundamentals behind the unquestioning advance have deteriorated for some time. Expectations for growth were clearly padded by speculative demand for quick returns. Today’s pull back is certainly not confirmation for a major turning point; but it is a first step towards such a move. And, considering the aggressive pace of oil’s appreciation over the past week, a significant retracement is reasonable even under staid otherwise conditions.

For crude specifically, the fundamental supply-and-demand backdrop could easily justify prices considerably lower. This past week’s Energy Department numbers have confirmed a significant glut of fuel inventories that won’t be easily absorbed with consumption not keeping pace with economists’ and market participants’ estimations for economic activity. Today, OPEC President Jose Maria Botelho de Vasconcelos said the oligopoly may increase production targets at its next meeting on December 22nd should prices climb above $75 per barrel. The official went on suggest a $75 level was ‘acceptable;’ but should oil near the $100 mark, it would make a supply boost inevitable. IEA Chief Economist Fatih Birol considered inflated prices a significant risk and considered taxing costs “a significant risk to recovery efforts.” United Arab Emirates Oil Minister Mohamed al-Hamli offered his own opinion of what was factors were elevating prices. He said current levels were a mixture of both “speculation: and “signs of recovery,” but he considered a wait-and-see approach the most prudent going forward. The UAE official would further project an increase in demand of 700,000 barrels per day next year. Finally, the Emancipation of the Niger Delta group called a cease-fire after talks with Nigerian President Umaru Yar’Adua bore fruit. This should help stabilize production from this region – though it is otherwise responsible for a small percentage of global output.

Commodities – Metals

Gold Threatens to Break Congestion as the Dollar Rallies and Risk Appetite Falters

Spot Gold  -  $1050.77 //  -$4.63  //  -0.44%

Like equities, the dollar and the energy complex; gold was tempting a meaningful reversal from its recently-set record highs. Since spot hit $1,070.80 back on the 14th of the month, subsequent peaks for this precious metal have developed lower and lower. However, through these lower highs, the overall bullish bias was maintained. In today’s session however, the congestion of the past three weeks was finally overwhelmed. A reversal at these levels could easily lead gain momentum owing to profit taking from speculative interests. The COT data from this past Friday offered very early signs of just such a move with noncommercial net longs falling 1.5 percent in the week through October 20th from a record high. At the same time, the SPDR Gold Trust – the world’s largest – reported once again increase in its holdings. With speculative interests at the heart of price action, not even an early morning advance in copper to a 13-mongh high following the first reported increase in Chinese imports of the metal in three months could muster a reasonable defense. Looking ahead, options expiration could offer volatility tomorrow and Thursday’s US 3Q GDP release could delay bigger shifts. In the meantime, risk appetite is in control.

Spot Silver  -  $17.52  //  -$0.17  //  -0.96%

Silver marked its worst daily performance since August 17th today. As with gold and other capital markets, the primary driver for price action was risk appetite. After two weeks of congestion, a break to the downside can rouse concerns that profits that late-in-the-rally paper profits could be lost in a deep retracement – in turn feeding a reversal. However, as long as sentiment doesn’t suffer a deep retracement, this precious metal could hold up relatively well (at least compared to the more expensive members of its class); because the investment in this physical asset is far more affordable. Referring to some of the largest funds backed by silver, iShares Silver Trust at 8,612.57 tons through Oct 23rd and ETF Securities reported its holdings of the metal rose 1 percent to a record 21.054 ounces on Friday.

-Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com