Fundamentals

Crude Rallies as the Risk Appetite Rallies and Ida Threatens the Gulf of Mexico

North American Commodity Update

Commodities – Energy

Crude Rallies as the Risk Appetite Rallies and Ida Threatens the Gulf of Mexico

Crude Oil (WTI) -  $79.40  //  $1.97 //  2.55%

Crude has retraced much of Friday’s significant losses as Tropical Storm Ida approaches the Gulf of Mexico and the dollar tumbles. Between the two market drivers, sentiment is the more pressing concern for those trading the necessary commodity. Risk appetite started its climb early Monday morning in the Asian session and maintained its bearings into the US open. Speculation as to what catalyzed the advance is wide spread; but combination of the Group of 20’s announcement that they will maintain stimulus and low rates until a recovery is established and the natural inclination to retrace Friday’s losses are likely the primary engine for this change. The shift in yield demand is further aiding crude’s climb through the weakened dollar. The standard pricing instrument for the commodity, the dollar briefly tested 15-month lows on a trade-weighted basis this morning but has since regained its footing.

For fundamental traders, burgeoning supply constraints raised the possibility that demand can finally work down a reasonable amount of the glut of inventories that has built up owing largely to the global recession. Production in the US Gulf of Mexico (accounting for more than a quarter of US crude output) will be cinched off by the approach of Hurricane Ida. This is the first major storm of the season (usually running between June and November) to disrupt production. Many major oil wells have been evacuated ahead Ida’s approach; but recent weather reports suggest the storm has lost strength. Ultimately, this supply disruption will do little to balance supply and demand. Other headlines today point to a glut that will be maintained by world producers who are trying to regains the profits of previous years by supplementing price with output. According to a Bloomberg News Survey, the number of oil tankers to vie for transportation contracts over the next 30 days jumped 11 percent. At the same time, freight rates dropped by their most since July. It is clear at this point that it will take a significant change in demand to offset the overwhelming level of supply and not just modest disruptions in output.

Commodities – Metals

Gold Sets another Record High thanks to the Dollar’s Misfortunes

Spot Gold  -  $1,104.25 //  $9.15  //  0.84%

With a market-wide rally in risk appetite, it comes as little surprise that gold would climb to a record high through Monday. The precious metal has many roles given current market conditions and speculative asset is perhaps the facet that maintains the greatest correlation to underlying price action. However, while sentiment was indeed improving and bolstering the gold, how much of this was due to the weakness of its primary counterpart for valuation: the dollar? In conjunction with the gold’s record-breaking push, the US currency tested and briefly pushed a 15-month low on a trade-weighted basis. If we value the commodity in difficult currencies, we see dramatically different pictures of price action. For example, valued in Australian dollars, gold actually fell 0.83 percent through the session; and recent highs are very far the record highs that have been reported in the past. For speculators, the means for returns are not as important as the actual return itself. This morning, ETF Securities reported holdings rose 0.9 percent to 7.913 ounces. However, there will eventually be a point where speculation cannot maintain highs without a significant retracement. The Commitment of Traders (COT) readings from this past Friday reported speculative interest eased back to a net long of 241,319 contracts.

Spot Silver  -  $17.55  //  $0.16  //  0.93%

Silver would make a sharp run through the Monday session; but highs proved to be took difficult to hold for the precious metal. What was at one point a 2.32 percent rally would later retrace most of its gains through the end of the US session as underlying sentiment cooled throughout the US markets. Confirmation from the G-20 this weekend that interest rates would be kept at their extremely low levels and stimulus efforts would remain in place helped pad expectations for an unencumbered speculative market. However, this outcome was already more than priced in; and demand from speculators and industrial sources for this commodity look more constrained than they may have seemed just a few months ago. This morning, ETF Securities reported its silver holdings rose 0.2 percent to a record 21.472 million ounces.

Written by John Kicklighter, Strategist
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