Fundamentals

Oil Plunges as Risk Appetite Ebbs and Inventories Rise

North American Commodity Update

Commodities – Energy

Oil Plunges as Risk Appetite Ebbs and Inventories Rise

Crude Oil (WTI) -  $76.94  //  -$2.34 //  -2.95%

Crude was already on the decline before the Department of Energy released its weekly inventory numbers; but the cumulative effect of an increase in stockpiles,  pullback in risk appetite and rally in the US dollar was the worst daily performance for the commodity since October 30th. In turn, today’s bearish drive only further develops a wedge formation four weeks in the making. It would be fitting – but not altogether surprising – if a break from this pattern coincided with a definitive change of trend for risk appetite. However, keeping tabs on underlying sentiment trend; the Dow Jones Industrial Average’s decline today was from new highs for the year and the US dollar (the indisputable safe haven currency) was recovering from 15-month lows set just yesterday.

If (or when) a true bearish reversal develops, there will be more than enough fundamental support for the bearish crowd to facilitate a correction. Supply concerns were exacerbated by today’s US Department of Energy inventory numbers. According to the report, crude stockpiles rose 1.762 million barrels through the week ending on November 6th while gasoline stores advance 2.46 million barrels. This puts reserves of oil and gas up 7.5 percent and 7.3 percent from same period a year ago. At the same time, imports rose 6.5 percent to 8.66 million barrels per day. The true concern for oil traders and producers going forward, however, is demand. According to the DoE’s assessment, fuel consumption is down 4.3 percent to 18.3 million barrels per day – the lowest since June. This has led US refineries to reduce capacity to 79.9 percent to the lowest levels since September of last year when Hurricane’s Ike and Gustav disrupted business. Now the problems are far more fundamental and lasting.

Commodities – Metals

Gold’s Efforts at Pushing Record Highs Amplifies its Correction

Spot Gold  -  $1,103.80  //  -$13.60  //  -1.22%

Despite hitting a fresh record high of $1,123.38 in the Asian session, spot gold would end Thursday with its biggest daily loss since the false bearish trend reversal back on October 26th. When looking for the source of this unfavorable change in the winds, it was not difficult to identify risk appetite’s role. Losses for equities, bond yields and the broader commodity complex gained traction through the US hours. For its own part, the precious metal would suffer a more aggressive decline than most of its counterparts thanks to its proximity to record highs and the volatility that has held through its steady rally through the past two weeks. As for its other roles (aside from speculative asset), playing the alternative to the US currency, the dollar embarked on its largest rally in months. And, as an inflation hedge, the iShares TIPS index retreated from the 13 month high set yesterday with its biggest intraday decline in nearly six weeks. Nonetheless, speculators are holding firm with aggregate open interest in the futures market still at its highest levels since June of 2008.

Spot Silver  -  $17.22  //  -$0.39  //  -2.22%

Though silver and gold hold different levels of correlation to risk trends; when there is a severe shift in the underlying driver, both will respond with comparable reactions. For the less expensive commodity, the selling pressure wouldn’t break any trends or measure support levels. Nonetheless, the consistent chop of the past seven active sessions has already eroded confidence in reviving bullish convictions. Open interest was already falling back from the near 15-month high set at the beginning of the week. We will have to look at Friday’s COT numbers to further bear out speculators’ interests in the market.

Written by John Kicklighter, Strategist
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