Fundamentals, Oil & Gold

Oil’s Rally Stalls as Growth Doubts Creep Back and Speculative Interests Falter

Commodities – Energy

Oil’s Rally Stalls as Growth Doubts Creep Back and Speculative Interests Falter

Crude Oil (WTI) -  $77.06  //  -$2.81  //  -3.52%

After posting its biggest daily advance since September 30th yesterday, crude would undergo a sharp and immediate pullback through Friday trade. Like most other speculative-based assets, oil found and lost its short-lived period of strength through the strong headline 3Q GDP reading. However, given enough time to fully assess the data; the market seems to have come to the conclusion that the return to growth for the world’s largest economy was not significant enough a catalyst to offset the gradual deflation of sentiment that developed through the first half of the week. For the energy complex, the United States’ recovery was largely built on government stimulus that naturally has a short life span. In contrast, consumer demand (outside of the ‘cash-for-clunkers’ program) was reserved and presents little appetite for demand (be it for gasoline or products that require fuel to manufacture). Today’s event risk further depressed projections for demand.  Personal spending for the month of September dropped 0.5 percent as expected – the sharpest drop this year.

Whether crude develops is bearish ambitions in the week ahead will largely rest with the health of risk appetite and the pace the US dollar sets. In the background, fundamentals for the vital commodity argue for a significantly lower price. This past week, the US Energy Department reported increases in crude (0.23 percent) and gas (0.78 percent) while the EIA detailed a 0.67 percent increase in natural gas stockpiles. Ultimately, these are just modest increases to already sizable surpluses; but it nonetheless draws a distinct comparison to supply and demand imbalances. On tap today, a few headlines were giving energy prices a rise. The United States second largest oil producer, Chevron, reported a smaller than expected 3Q drop in profit thanks to the biggest increase in output since 2005. This effort to offset the low prices that developed through increasing volume is not unique to this firm and offers a key component to the current inventory glut. In other news, Baker Hughes reported US active oil rigs grew by 18 for the seventh weekly increase to a January high of 330. Also, AAA said the average price per gallon for unleaded gas in the US rose to a new high for the year of $2.695.

Commodities – Metals

Gold and Silver Mark Sharp Bounce on Rebound in Risk Appetite

Spot Gold  -  $1046.10 //  -$0.90  //  -0.90%

The sharp reversal in risk appetite Friday was tangible for most asset classes; but gold’s decline seemed to be more reserved than some of its counterparts’ performances. Most notable was the discrepancy between crude and gold. While oil has a fundamental demand imbalance weighing on its high price, gold is pushing record highs and almost exclusively due to speculative demand. The unwinding associated with profit taking would theoretically lead to an exaggerated decline in the metal; but instead, we see volatility and the market-wide shifting in funds towards safety has refreshed gold’s value as a safe haven. This is an uncertain balance; but should the deteriorating in sentiment continue, the commodity’s near-record high will push in due course push prices in one direction: down. In the meantime, SPDR Gold Trust reported it left its holdings unchanged at 1,104 tons, ending a three consecutive days of reductions.

Spot Silver  -  $16.37  //  $0.32  //  -1.89%

Silver does not have the long-term safe haven appeal than gold does; and we could see this fact born out in a comparison of price action between the two metals. While the more expensive security would look to close the day nearly unchanged, silver was deep in the red. The sharp rally in optimism yesterday following the US GDP release was quickly unwound today as traders fell back into the trend that was developing through the first half of the week and growing more skeptical of the disparity between sentiment’s astronomical rise and otherwise disappointing fundamentals. As the cheap alternative to gold (and without the safety attributes), restoring silver’s rally will depend on a recovery in risk appetite next week.

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