Fundamentals, Oil & Gold

Oil Fully Retraces Early Morning Rally after Risk Appetite Stalls

North American Commodity Update

Commodities – Energy

Oil Fully Retraces Early Morning Rally after Risk Appetite Stalls

Crude Oil (WTI) -  $77.64  //  $0.17 //  0.22%

Crude exhibited heavy volatility but a split view on direction through Monday. A spark of risk appetite opened trade for the week in the Asian session; and the wave of optimism wouldn’t hold up through the full trading day. Through the European session oil was driving steadily higher until the liquidity punch associated with US interests sparked an adjustment rally that sent commodities, equities, currencies and debt yields to new highs. However, considering the broader market had already priced in the level of sentiment before the US-borne rally, those assets that weren’t fundamentally attractive on their own wouldn’t hold onto their gains. For crude, the reversal in sentiment marked a sharp drop in price – one that eventually fully retraced the opening gains. Looking at a month’s worth of price action, the active WTI contract remains clearly confined to a descending trend channel that distinctly reflects the waning influence of risk appetite and the constant concern related to a supply-and-demand balance that is tilted heavily towards an inventory glut.

For fundamental interest today, there were offsetting announcements and releases; but reports on neither side would offer a meaningful shift in production or consumption expectations. For bulls, news that Iran was testing its air defense systems to ward off potential attack on the country’s nuclear facilities threatened output from one of the world’s largest crude producers. Yet considering, the sanctions the UN has on the nation already, the impact these exercises realistically has on expected output is limited.  In contrast, the Russian Oil Ministry released its oil production figures for October. According to the report, the world’s largest energy producer increased crude output 4.4 percent to 10.4 million barrels per day and exports grew 5.3 percent to 5.73 million barrels per day. Looking ahead, the US Department of Energy inventory figures due Wednesday are expected to show a measured rebound in American stockpiles after the disruption caused by the Hurricane Ida. A Bloomberg consensus of a 1.5 million barrel increase is relatively restrained and fully priced in. The less influential but earlier released API figures due Tuesday’s evening in the US will gauge whether such expectations are realistic. However, even with these tangible fundamental milestones in place; the market’s primary concern remains risk appetite.

Commodities – Metals

Gold Holds Gains from yet another Breakout to Record Highs

Spot Gold  -  $1,166.00  //  $15.40  // 1.34%

Gold was running purely on market sentiment Monday; and the opening surge in optimism played to the commodity’s natural bias. As a side effect of a sharp rally, the precious metal easily escaped the influence of last week’s congestion band and surged as high as $1,174 through the open of the US exchanges. However, just as surely as the advance in optimism carried the speculative asset higher, it would also pull spot back down when bullish interests dried up into the afternoon of the US session. Yet, just as we have seen play out consistently in past weeks, the eventual correction for gold was far more restrained than its counterparts’ retracements. The steady build in interest through demand for an alternative to the dollar leveraged the commodity on a sharp retreat on the benchmark currency and news from Bank Rossii (the Russian central bank) that they had increased their holdings 2.6 percent last month to19.5 million ounces. Playing on its role as an inflation hedge, macro-economic indicators reported a notable pickup in European business activity this month, a surge in US existing home sales and steady growth in Canadian retail receipts. In turn, the iShares TIPS fund (a measure of inflation through government debt securities) rose for the first time in four days – though it is still off the 14-month highs set last week. From the futures market, volume rose on the New York Mercantile Exchange hitting 204,000 contracts trade for the December 2009 security; but this is still below the level of activity measured through the November 3rd /4th rally. Aggregate open interest is still pushing its highest levels sicne January of 2008.

Spot Silver  -  $18.56  //  $0.05  //  0.28%

Silver was more intune with crude than it was with gold. While the metal rallied through the Asian and European sessions, the advanced was far more restrained than what we say with its more expensive counterpart. What’s more, when sentiment began to ebb, silver marked a much deeper retracement that would ultimately usher the natural resource to a bearish close on the day – the third decline in so many active trading sessions. In effect, silver has established high volatility but garnered no sense of direction for the past five days (since the sharp rally that overtook the $18 per ounce milestone). Looking at futures activity, volume on the December 2009 contract continues to taper off from last week’s surge. Aggregate open interest on the other hand is still pushing its highest levels since July of 2008.

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