Fundamentals

Oil Marks a Critical Trend Break as Sentiment Extends its Descent

North American Commodity Update

Commodities – Energy

Oil Marks a Critical Trend Break as Sentiment Extends its Descent

Crude Oil (LS NYMEX) –  $71.02  //  -$2.12 //  -2.90%

After suffering its largest single-day decline since July Thursday, crude would put in for a relatively volatile finish through the end of the week. It didn’t take long in the overnight session for bearish sentiment to build up once again and drive the commodity through critical support. While $72.50 may seem a relatively innocuous level, it represented the confluence of a historically well-tested barrier (as support and resistance) and the current standing of the rising trend of lows going back to last year. At its lowest point, Friday’s session losses totaled as much as 5 percent – establishing an incredible, intraday bear trend. However, the selling pressure wouldn’t last through the end of the session and week. The market-wide unwinding of risky positions has also encouraged a considerable interest from bears to actively short this impressive run. Moreover, as the weekend comes to a close, traders are taking the opportunity to book profits – subsequently pulling the market’s up from their lows. For oil though, the breach has been made and fundamentals are supportive of a bearish phase as long as speculative interests are either negative or otherwise tame.

In fact, we have seen relatively little on the fundamental front to suggest excess oil inventories will be absorbed or that production will be meaningfully reduced until an equilibrium is found once again. The week-to-week changes in US inventories for crude, gasoline and distillates do relatively little to change total reserves in the states much less for the entire world. Furthermore, with news that OPEC will increase its shipments through February and economic activity will be slower to recover than what speculative markets have priced in. Data today has produced little in the way of pull through demand expectations. The non-farm payroll (NFP) report is considered one of the most accurate leading indicators for the United States (the world’s largest energy consumer). With that in mind, the unexpected 20,000-job drop in net payrolls through January offered a dose of reality that contrasts the cheering at the previous release that offered the first net increase in employment in two years through a revision of the November reading. As policy makers and central banks have warned the world over, the world is on pace for recover; but the pace will be sedate for some time.

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Commodities – Metals

Gold Retraces Friday’s Losses but Bear Trend Still Intact

Spot Gold  -  $1,063.50   //  -$0.20 //  -0.02%

Where can gold find its fundamental relief? The precious metal plays the distinct roles of speculative asset, safe haven, and dollar and inflation hedge. Few of these traits were working in the commodity’s favor Friday or through the entire week. There is still some bullish influence through the need for an investment that can offset the threat of accelerating price pressures in the coming months and years. However, inflation is barely showing up through the short-term and there is little threat of medium-term pressures exceeding the targets that most central banks are targeting. In contrast, the stress on underlying sentiment and its subsequent influence on the US dollar have put the record highs that gold recently tested into deep relief. From a traders’ perspective, the speculative capital that has found its way back into the market has artificially inflated those asset classes that can produce capital gains. Yet, this mass return of funds is avoiding more liquid securities (Treasuries) and is further concentrated by the loss of derivatives and other assets that absorbed much of the froth during the height of the market’s rally. With the Dow pushing 10,000, the dollar advancing to an eight-month high and oil marking a potentially-critical break; risk aversion can maintain its influence over the market for some time.

Spot Silver  -  $14.95 //  -$0.31 //  -2.03%

Though the silver’s tumble through Friday was nowhere as aggressive and consistent as the previous day’s plunge, the progress the commodity has made this past week is the real takeaway. Where gold can salvage lost ground through its claims to a history as a safe haven or speculation that central banks will look to load up on the metal to offset their US dollar exposure; silver’s primary role in the market is as a speculative asset. Therefore, as the market extended its risk aversion trend and the dollar pushed higher, the more affordable metal would push its way down.

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