Fundamentals

Oil Sees Extraordinary Levels of Volatility but Still Lacks Direction Despite DoE Inventory Report

North American Commodity Update

Commodities – Energy

Oil Sees Extraordinary Levels of Volatility but Still Lacks Direction Despite DoE Inventory Report

Crude Oil (LS NYMEX) -  $77.50  //  $0.27 //  0.35%

It was a battle of influence over oil’s bearing; but neither risk appetite nor the weekly US inventory figures leverage much pressure on the market either way. However, in the absence of a clear breakout and steady trend; there was certainly an excess of volatility with the active NYMEX futures contract frequently spanning the approximately $1 range the commodity has carved out a number of times through the European and US sessions. Establishing the primary, fundamental driver for oil; an assessment of price action today and over the past month suggests general investor sentiment still reigns over the influence that supply-and-demand fundamentals can muster. This does not come as a surprise considering that, despite the week-to-week changes in production and consumption of petrol products, there the existing gap is still extraordinary given the hold-over effects of the global recession and producers’ efforts to maintain revenues. In risk appetite, we see the impetus for the high volatility and non-directional price action in crude. This week’s bullish interests started to fade after European markets came online. London and New York stock trading was relatively choppy; but the asset class’s overall course was bearish. Yet until there is a clear break and trend established for equities, oil will likely struggle to establish direction.

In the meantime, the fundamentals behind the market would develop through a round of economic data and the weekly Department of Energy inventory figures. For a macro reading on demand, service sector activity surveys for the US, UK and Euro Zone provided a mixed view of health. The US ISM report notably edged to its highest level since May of 2008; but the reading was nonetheless weaker than expected. The Euro Zone figures were revised up from their initial reading, though they were still off December’s two-year high; while the United Kingdom’s figures eased to a five month low. The more direct driver for price action was the US stockpiles report for the week ending January 29th. The headline crude inventory reading reported a 2.317 million barrel increase through the week’s end which beat expectations of the 400,000 contraction forecasted and the 3.89 million barrel drop through the previous week. Anchoring the report however was the 1.306 million and 948,000 barrel slump in gasoline and distillates respectively. Looking at the other side of the market, gasoline demand in the four weeks ending January 29th fell 0.5 percent to 8.64 million barrels a day – the lowest level since 2004. Furthermore, in an effort to curb supply, refineries were operating at only 77.7 percent – the lowest rate of activity since at least 1989 when hurricanes haven’t specifically forced closures.

Commodities – Metals

Gold Develops a Broad Wedge as the Market Awaits a Clear Drive for Risk Trends

Spot Gold  -  $1,111.23   //  -$3.23 //  -0.29%

While silver and copper were deep in the red through Wednesday’s active US trading session; gold would maintain a sense of stability. With today’s pullback, the commodity has taken the next step towards developing a broad wedge formation that has roots going back to the record high set back in December. It won’t be long until gold bugs will be forced to decide a clear direction for the precious metal. But what will be the ultimate catalyst for this move? Most likely, risk appetite. Sentiment would take the lead on gold’s price action with the commodity’s price action resembling the same chop that developed with benchmark equity indexes. After having spent the early part of this week retracing the aggressive unwinding on high-yield positions through the second half of January, investors are now looking for a clear fundamental impetus to carry a meaningful trend. Today’s US ISM report and ADP payroll numbers couldn’t provide a firm footing for speculators. However, both indicators have bolstered the outlook for Friday’s non-farm payrolls release – a release that can single-handedly redefine the market sentiment. In the meantime, gold’s role as an inflation and dollar hedge will work with its speculative function to determine direction and volatility.

Spot Silver  -  $16.34 //  -$0.36 //  -2.18%

Though underlying risk appetite would establish little in the way of a clear direction through Wednesday’s session, silver saw an exceptionally sharp decline through the day. For drive, the metal was taking much of its momentum from the US dollar itself. The single currency (the primary means of pricing silver) put in for its first advance in three days. However, until the dollar index can overtake its seven-month high at 79.50 and gold slips below $1,075; the prospects for a bearish trend could be limited.

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