Oil & Gold, Technicals

Crude Oil Rises for the First Time in Six Days on Thin Liquidity

North American Commodity Update

Commodities – Energy

Crude Oil Rises for the First Time in Six Days on Thin Liquidity

Crude Oil (LS NYMEX) -  $78.25  //  $0.25 //  0.32%

Constrained liquidity helped crude traders snuff out a burgeoning bear trend Monday. With the US market offline for a bank holiday, the benchmark oil contract was able to post its first bullish close in electronic trading in the past six trading days. However, it is because of this limited speculative interest that we have to take this opening move with a grain of salt. Nonetheless, there were fundamental considerations to work with for those that were still trying to make trades in the thin market conditions. First and foremost, for those that are monitoring inter-market correlations; modest dollar weakness through the day encouraged a tempered strength from the speculative asset. On the other hand, it bears mention that the benchmark currency has not defined a clear direction for itself in nearly a month. Considering the greenback’s association to underlying sentiment and its role as the primary pricing instrument for commodities, it is worthwhile to await a clear bearing on this instrument before marking a definitive trend on oil.

Through more mundane and definable channels, supply-and-demand fundamental would also be in play Monday. In the early trading ours, China Oil, Gas & Petrochemicals issued forecasts for Chinese imports to increase up to 15 percent through 2010 as the nation enters the second phase of its plan to build strategic reserves. Perhaps more influential however were remarks from the Qatar Energy Minister who speculated the Organization of the Petroleum Exporting Countries (OPEC) would not raise output through the year, as current supply levels would be sufficient. However, looking through the rest of the week, output and consumption considerations may not work in bulls’ favor. This past week the Department of Energy reported a 3.699 million barrel increase in crude inventories despite frigid temperatures that would have theoretically boosted demand. Should this week’s stockpile report (due Thursday) issue another increase in holdings, it would be a sign that excess capacity can easily fill in should a temporary spike in demand present itself. The level of true fundamental demand is important to set against speculative interest as well. This past week, the CFTC’s Commitment of Traders update reported speculative long positions hit their highest levels since 1983 (at 135,669). Is this a leading indicator or simply a lagging reaction to the aggressive run up through the opening week of January?

Commodities – Metals

Gold Gears Up for Possible Breakout as Liquidity Fills out and Speculation Recovers

Spot Gold  -  $1,133.60   //  $2.68 //  0.24%

Though there was plenty of activity in speculative markets through the Asian and European sessions, gold as little moved through Monday’s session. Considering the terminal congestion pattern the commodity has worked its way into over the past few weeks, it comes as little surprise that traders would defer a decision on market direction for when US liquidity is back on line. As for background fundamentals, there was plenty for traders to contemplate through today’s restrained session. At the front of traders’ minds was the modest decline in the US dollar. As for speculative interests, there were moderate trends developing amongst the larger indices in the world’s more liquid markets – though they would essentially offset each other. Asian equities would tumble on the day with the Nikkei leading the way with a 1.2 percent slump through the opening day. In contrast, European indexes were on the rise with a 0.72 percent advance from the FTSE 100.  Looking ahead to deeper and more active markets for Tuesday, we may actually see the metal’s function as an inflation hedge come into play. This morning, Australian consumer and UK housing sector inflation figures boosted price pressures. Tomorrow, UK and New Zealand CPI indicators will add to the mix. However, everything considered, speculative interests hold the greatest potential for volatility.

Spot Silver  -  $18.64 //  $0.23  //  1.25%

Silver would work its way even further into a congestion pattern Monday with thin trading discouraging a clear bias on price action. That being said, the return of market depth Tuesday could encourage a rebound in volatility. If there is in fact an increase in activity, there is little room for this metal to move before spot threatens a potential breakout. Speculative traders will be particularly sensitive to volatility through the first full trading day of the week and will look to key market benchmarks (like The Dow and US dollar) for guidance.

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