Fundamentals, Oil & Gold

Oil Initiates its Biggest Rally in a Month as Manufacturing and Risk Appetite Improve

North American Commodity Update

Commodities – Energy

Oil Initiates its Biggest Rally in a Month as Manufacturing and Risk Appetite Improve

Crude Oil (LS NYMEX) -  $74.65  //  $1.76 //  2.41%

A bounce in capital markets and subsequent slip for the US dollar helped leverage a significant rally from oil Monday. This substantive rally, from the floor of a long-term rising trend, would punch in as the largest single day advance since December 23rd (back when the commodity was in the midst of its steady advance to new yearly high). And, while there was plenty of fundamental fuel to support the session’s strength; the real source of optimism would come through underlying investor sentiment itself.  Equities were off to a slow start in the Asian session; but by London and New York trading hours, the benchmark asset was on a steady footing for a pickup from the multi-month lows the markets left off on this past Friday. On the other side of the coin, the US dollar reacted through its funding currency / safe haven status that sent the currency lower. As the primary valuation tool of the commodity, this slip for the greenback would only further crude’s bounce. However, it is important to note that today’s modest advance doesn’t necessarily usher in a definitive trend reversal. There is plenty of event risk scheduled this week that can alter the course of risk appetite over the coming days; but in the end, it is the threat of what can’t be foreseen that is always the greater source of market anxiety.

Turning from sentiment to tangible shifts in supply and demand, the economic docket was tipping the scales on consumption forecasts. Manufacturing activity surveys from the United States, China, the Euro Zone and the United Kingdom were all scheduled for release Monday; and each would add to the picture of economic recovery and growing fuel consumption. For the world’s largest energy consumer, the January ISM Manufacturing report offered a clear bearing for fundamental oil traders. The 58.4 reading was not only the strongest in over six years; but the clear improvement in production, orders and employment component figures suggest the sector’s strength is not simply a temporary hiccup. Along similar lines, China (the second largest consumer of fuel) saw its manufacturing survey hit a record high, the UK reading notched a 15-year high and the Euro Zone’s reading was revised up to a fresh two year high. This pickup in activity has not yet translated into recent inventory readings; but last week’s DoE crude report (for the week ending January 22nd) did report a sharp 3.89 million barrel drop. The consensus forecast for this week’s reading is pointing to no change.

Commodities – Metals

Gold Posts its Biggest Rally Since October as the Dollar Slips

Spot Gold  -  $1,105.13   //  $24.28 //  2.25%

The many fundamental faces of gold were all lining up in support of the commodity today, leading the metal to its biggest single-day rally since October 6th. Among the different drivers that contribute to a complete picture of fundamental gold demand, the asset’s speculative appeal was bolstered by a boost in risk appetite that would buoy stocks and other commodities. This shift in investor sentiment would further have repercussions for gold through its connections to the safe-haven US dollar. The funding currency eased back from six-month highs against the euro this morning as data impressed and traders looked to recover some of the losses the capital markets have incurred this past month. The currency’s influence over the metal would actually go a little deeper (and perhaps draw connections to gold’s value as an inflation hedge). US President Obama proposed the 2010 budget, which would lead to a record $1.6 trillion budget gap. Not only does this diminish the appeal of the US dollar (as it would entail greater credit risk and an increase in the money supply); but the implications for government-derived inflation pressures further necessitates a hedge for purely financial assets. In the end, today’s rally was aggressive; but the market’s appetite for risk has not fully recovered. Gold bugs should keep a close eye on $1,075.

Spot Silver  -  $16.64 //  $0.43 //  2.65%

After its 15-plus percent tumble these past two weeks, silver was poised for a hearty rebound to start this week off. The subsequent rally was the biggest in four weeks and would officially forestall the break of a five-month range floor near $16. For fundamental drive, the combination of a weakened dollar and a bounce in risk appetite would produce a steady advance throughout the day. However, it is worth mentioning that despite the strength in the underlying, volume in the active silver futures contract on the NYMEX exchange was lower today than the activity that was associated with last week’s congestion.

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