Fundamentals

Oil Market Devastated by Plummet in Risk Appetite but Larger Trend Still in Place

North American Commodity Update

Commodities – Energy

Oil Market Devastated by Plummet in Risk Appetite but Larger Trend Still in Place

Crude Oil (LS NYMEX) -  $72.98  //  -$4.00 //  -5.20%

It wasn’t difficult to spot the fundamental driver to crude’s massive decline today. Risk appetite weighed all risk asset classes down with the largest collective drop in capital markets in over six months. For oil, the statistics were not much better than average. The commodity plunged over 5 percent through the day – the biggest single-day decline for the benchmark since July. However, for chart readers, today’s losses could merely be chalked up to a severe decline and not a full bear-trend development should the market move in to protect the $72.50. Like 10,000 for the Dow, this level is easily recognized by speculators and commercial investors alike. Furthermore, with the media attention that the market losses of the past month have generated, crude will grow increasingly sensitive to any and all market fears that emerge from scheduled and exogenous event risk. For today’s sharp declines, the fundamental impetus has been associated to a refocusing on “periphery-European” member event risk and positioning unwinding ahead of Friday’s US payroll report. These are no doubt contributors; but the bearish pressure has truly been building for quite some time; and today’s increase in activity is just another volatile start to a bigger correction.

Looking ahead to tomorrow, energy traders will be looking to the Dow Jones Industrial Average and the US dollar for cues on the direction of crude. The benchmark equity index is among the best measures for underlying investor sentiment because the rising risk appetite translates almost directly into buying while a turn in risk appetite will lead to a wave of selling. For the dollar’s part, the global benchmark stands as the market’s primary safe haven currency. Furthermore, the currency’s reaction to sentiment shifts will leverage oil’s own response as a speculative asset as the greenback is the primary pricing tool for the commodity. In the background, the big picture glut in inventories and stark lack of demand following the worst global recession in recent history is enabling crude to make progress on changes in risk appetite. This week’s DoE numbers reported refinery activity in the world’s largest economy fell to its lowest percentage of capacity (in periods not effected by hurricanes) since at least 1989. The effort to curb supply is being made; but without a meaningful increase in demand with a recovery in economic activity, the gap between consumption and supplies will remain extraordinarily wide.

Watch our weekly, live coverage of the DoE Inventory figures every Wednesday beginning at 10:15 AM EST.

Commodities – Metals

Gold Suffers Its Largest Single-Day Decline in 14 Months and Breaks Support Along the Way

Spot Gold  -  $1,062.30   //  -$47.50 //  -4.28%

The entire metal complex was tumbling through Thursday’s active session; but gold took the lead among media highlights. The day’s drop covered the bounce earlier in the week and more. In fact, the precious metal suffered its biggest single-day loss since December 1st, 2008. What’s more, unlike the Dow and crude, gold’s downdraft would push the market through meaningful support and open the market to three-month lows that find support scattered and at relatively weak levels below. Clearly, momentum and underlying sentiment trends are key in defining the commodity’s bearings from here on out. As one of the market’s favored dollar-hedges, gold would suffer from the currency’s climb to July highs. More invasive, however, was its role as a speculative asset. Fear over the credit stability of sovereign debt from countries like Greece, Spain and Portugal added fuel to a fundamental fire that was already smoldering beneath the market’s placid surface. On the other hand, the correlation between gold and underlying sentiment further suggests its role as a safe haven has been overwhelmed. At such dear prices, it is hard to justify the value in even this historical harbor from rough financial seas.

Spot Silver  -  $15.38 //  -$0.99 //  -6.06%

Just like gold, crude and equities; silver would suffer from the market-wide shift in the risk/reward equilibrium. However, as is common with this particular metal; declines for silver would ultimately outpace those for many of the other liquid assets. Part of the reason for this is the natural influence of margin and open interest behind the futures market. What’s more, this particular commodity lacks the safety aspect of gold and the mass of investor capital that finds its way to equities. Volume on today’s decline was much heavier than the previous days’ advances, suggesting the true trend lies to the downside.

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