Fundamentals, Oil & Gold

A Surprise Drop in Crude Inventories and Advance in Risk Appetite Leads Oil to a Bullish Breakout

Commodities – Energy

A Surprise Drop in Crude Inventories and Advance in Risk Appetite Leads Oil to a Bullish Breakout

Crude Oil (WTI) – $80.24 // $0.64 // 0.80%

Speculative interests and supply-side fundamentals would work together to earn crude a notable break from congestion Wednesday. Well before US liquidity came online, building optimism behind equity benchmarks and a weak US dollar would initially drive the commodity through $80 per barrel. Follow through was reserved however as market participants awaited the round of heavy round of marco economic event risk that is scheduled for this week. The FOMC rate decision was the first of these events. While the policy members of the world’s largest central bank wouldn’t change its rates, the commentary was noteworthy. According to the group’s assessment, economic conditions had improved in the weeks leading up to the two-day meeting, though it was their view that the economy would be “weak for a time” and inflation would similarly be “subdued.” However, for those that were looking for more than just a short-term response from volatility immediately following the event, the Fed took another step towards reducing stimulus by cutting its agency-debt purchase program from $200 billion to approximately $175 billion. This is another step towards the government removing its safety net from under speculators. We will soon see whether sentiment can hold up on fundamentals alone.

For the energy market, the end of the US session could have turned out very differently for price action depending on how the Energy Department’s inventory numbers reported. However, the headline numbers would uniformly support bulls with surprise contractions in stocks across the board. Crude stockpiles were forecasted to grow 1.5 million over the week ending on October 30th; but instead, they would drop 3.94 million barrels to 335.9 million. Gasoline inventories dropped 287,000 barrels against an expected 400,000 increase while distillate supplies fell 378,000. Another source of supply contraction was the 8.6 percent drop in imports to a two-month low 8.13 million barrels per day. All told, total fuel demand through the four-week period ending on October 30th was 4.5 percent weaker than the same period a year ago. However, it is important to note that this drop in inventory was not due to demand factors. With stores still pushing recent highs, refiners are trying to reduce the cost associated with backed up supply. Trimmed inventories will not be able to single handedly balance supply and demand to justify the current price levels.

Commodities – Metals

Gold Extends its Record Breaking Advance but is there more Central Bank Interest to Keep the Rally Going?

Spot Gold  -  $1092.40 //  $7.80  //  0.72%

Gold was able to capitalize on yesterday’s momentum and climb to a new record high through Wednesday’s session. However, there was little fundamental support for this extension; and that may ultimately prove the undoing of this sharp rally. Yesterday, through the height of its rally, the precious metal had surged more than $30 after market place filled out and investors responded to the Indian central bank’s 200 ton ($6.7 billion) purchase from the IMF. This is a natural response to one of the biggest central bank deals in decades; but the delay between the announcement and the market’s response should highlight a disconnect. Speculation was the primary driver behind this advance with investors looking to jump-start the next leg of a long-term advance and provide an opportunity to realize profit for those that were late to the game. Speculation is now focused on the likelihood that other central bank’s will follow India’s lead and turn into net buyers of gold as a means to diversify volatility currency reserves. However, this commodity is similarly volatile and expensive to consider as a viable reserve asset at this point. The IMF has approved for an additional 200 tons of gold to be sold; and it will likely find a buyer. However, this transaction alone will not revitalize demand for an asset that is already pushing record highs.

Spot Silver  -  $17.44  //  $0.24  //  1.39%

A gradual advance in equities and gold would encourage similar from silver Wednesday. Shedding much of the momentum that defined yesterday’s astounding rally, it is clear that the fundamental drive unique to the metals group has already worn off and risk appetite has once again filled in the fundamental gap. There is still room for the various capital markets to advance under optimistic winds; but a meaningful follow through will have to come through a meaningful shift in underlying sentiment. Taking note of speculative interests, iShares Silver Trust reported holdings were unchanged at 8,744 metric tons this morning.

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