Fundamentals, Oil & Gold

Oil Finally Marks a Critical Break but Risk Aversion will have to Step up for a Bearish Trend

North American Commodity Update

Commodities – Energy

Oil Finally Marks a Critical Break but Risk Aversion will have to Step up for a Bearish Trend

Crude Oil (WTI) -  $76.35  //  -$0.59 //  -0.77%

Though it wasn’t the catalyst for a trend reversal that it could have been, oil looks to have marked a clean breakout from a near month-long wedge formation in Friday’s close below $76.75. The hesitancy on follow through is a reflection of two contrasting forces: supply-and-demand fundamentals that maintain the theoretical value of the commodity and speculative interests that actually set price. Saudi Arabia’s Oil Minister Ali al-Naimi alluded to this confliction in a speech he gave in the early Asian session. He said that volatility and price extremes are a consequence of a lack in regulation on commodity exchanges, which diminishes the role of fundamentals in price action. Measuring speculators interests, the CFTC reported open interest for crude from Index Funds (more often than not a vehicle for speculation). According to the report, interest grew to 464,000 contracts through the September 30th period from 430,000 in the second quarter and 448,000 in the first. The regular, weekly Commitment of Traders  report showed some level of moderation, however, showed some level of moderation from extremes. Net non-commercial interest fell back from its 20 month high for a second week by 15,772 contracts to 88,045. At the same time, net commercial positions ticked up for the first time in five weeks from its more than 2 year extreme short bearing.

Speculative interest in crude aligns itself closely to the underlying influence of broader risk appetite. Investor optimism has more or less stalled in the past few weeks and this is perhaps the only reason that this vital commodity has been able to developed a bearish bias (though it is mild). In the absence of a bid for capital gains, we are left with a massive overhang of excess supply that would likely drag futures prices much lower. On Thursday, The Department of Energy reported US crude inventories rose 1.762 million barrels to a level that is 7.5 percent above the average for the period. Today, the EIA reported natural gas inventories rose 25 billion cubic feet in the week through November 6th to its highest level on records (going back to 1993). For this energy product, inventories typically start to tumble starting the second or third week of November on season demand; so we whether demand can soak up the excess. Though considering the DoE’s data showing fuel consumption was at a June low and the unexpected drop in the US University of Michigan confidence gauge (a reasonably accurate measure of consumer spending); the bearish fundamental pressure will remain.

Commodities – Metals

A Rebound in Sentiment Offers an Amplified Reversal for Gold

Spot Gold  -  $1,116.70  //  $12.90  //  1.17%

An article in the Daily Telegraph published earlier this week quoted Barrick Gold (the world’s largest producer of the precious metal) President Aaron Regent as suggesting global production has been on the decline since the beginning of this decade. This is a long-term, bullish pressure for a commodity that is already running at record highs. However, the highs that gold has recently forged are almost solely the influence of speculation rather than any real supply/demand imbalance. The market received a boast through Friday’s session from a rebound in risk appetite that was measured in equities and currencies and which subsequently allowed the spot market to almost completely retrace its losses from the previous day. In the fray of today’s rally, aggregate volume and open interest on the active futures contract hit its highest level since October 15th. Offering some moderation to speculative interests, non-commercial interest according to COT edged back for a fourth consecutive week to 238,060 – though it is still very close to its recent record high. As for its anti-dollar and inflation hedge roles, the dollar was off significantly for the session and iShares TIPS fund ended the session relatively unchanged after a volatility session.

Spot Silver  -  $17.39  //  $0.17  //  0.99%

Silver tentatively broke range support early Friday; but the bullish pressure that built up through the US trading hours would help the commodity to close near its session highs. However, it is notable that despite the strong bullish updraft, both aggregate volume and open interest eased off from the previous few session. Here, we can see speculative interests are far more tempered than that of its dearer counterpart. Though non-commercial interest behind gold has fallen four consecutive weeks, they were very modest contractions. In contrast, the same group has seen its net long position drop 21 percent in the past three weeks (though the speculative specific filings actually rose to a 15-month high, net 20,792 long contract position).

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Written by John Kicklighter, Strategist
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