Fundamentals

Crude Oil Steadies Below $80 ahead of Wednesday’s Inventory Numbers

North American Commodity Update, Last Updated 10/27/2009 2:40 PM EST (GMT = EDT +4:00)

Commodities – Energy

Crude Oil Steadies Below $80 ahead of Wednesday’s Inventory Numbers

Crude Oil (WTI) -  $79.03  //  $0.35  //  0.44%

The fundamentals of supply and demand are still pushing against speculative interest in the capital markets. However, with equities procuring a modest recovery of Monday’s losses and the Energy Department’s inventories data due tomorrow; the popular commodity has found a level of stability just a day after forcing an otherwise significant breakout. For risk appetite, the market is in need of a clear catalyst to keep up momentum. Without a fundamental driver, the gravity of the US 3Q GDP numbers due on Thursday will work to keep speculative capital sidelined. This single indicator will act as a proxy for global activity and thereby offer a benchmark for energy demands. Another stabilizing factor is the US inventory numbers from the Energy Department tomorrow. The consensus from Bloomberg sees a 1.5 million barrel increase in crude stocks through last week and a 1 million barrel drop in gasoline.

In the meantime, energy officials came out in force today with a myriad of comments – though the collective rhetoric wouldn’t cause too many waves. Following OPEC President Vasconcelos remarks yesterday, Kuwaiti Oil Minister Sheikh Ahmad Abdullah al-Sabah said he considered current prices “very good” and that he would consider raising output when crude stocks fell to 55 days. A more active, dovish tone was found in Ecuador Undersecretary of Hydrocarbons Julia Gonzalez report that output through 2009 would fall to 470,000 barrels per day to its lowest levels since 2003 – though due to a lack of investment not a desire to lower production. In contrast, Qatar’s Oil Minister Abdullah Al-Attiyah said his nation may increase its output by 1 million barrels a day going forward. What’s more, Nigerian oil (favored by US refiners) looks to be fully on stream immediate future after Henry Okah, head of the Movement for the Emancipation of the Niger Delta, said the “indefinite cease-fire” will last as long as talks with the President Umaru Yar’Adua are fruitful.

Commodities – Metals

Gold and Silver Extend their Declines as the Dollar Holds Firm

Spot Gold  -  $1037.70 //  -$0.80  //  -0.08%

After breaking the lower boundary of its two-week congestion band yesterday, spot gold would end up extending its declines through Tuesday’s session. However, an increase in volatility would produce more back and forth than real bearish progress. Traders and investors (who are differentiated by their holding period) are awaiting guidance on underlying market sentiment – and they are using the US dollar as a meaningful proxy. While risk appetite may have produced a meaningful turn yesterday; follow through is still a vital component of a new trend. There is little impetus to build  risk-laden positions or unwind current holds to book profit just yet as Thursday’s US growth report could spark a favorable (or unfavorable) move. However, looking beyond near-term event risk, positioning and the overall level of the precious metal suggests it is still well over-valued. Looking back to this past Friday’s COT data, net long noncommercial longs dropped 1.5 percent to pull it back from record highs. Today, the SPDR Gold Trust, the world’s largest ETF for gold, reported its holds dropped 1.22 percent or 1.22 tons through the week of October 26th to 1,106.87 tons.

Spot Silver  -  $16.65  //  -$0.43  //  -2.52%

Like most of the precious metals, silver was down through Tuesday’s session; but its pace was far more aggressive than all of its counterparts. Spot silver tumbled as much as 3.54 percent through the morning and produced its largest back-to-back decline since at least the May 12/15 tumble. This divergence with gold suggests investors are not as concerned with exiting their less-costly silver positions even though sentiment has not fully extended its tentative reversal for the week. With growth numbers scheduled for release later this week, the current plunge will likely stabilize soon.

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