Fundamentals

Oil Maintains its Bearish Convictions but Easier Sentiment Trends and Cooler Temperatures Temper Momentum

North American Commodity Update

Commodities – Energy

Oil Maintains its Bearish Convictions but Easier Sentiment Trends and Cooler Temperatures Temper Momentum

Crude Oil (LS NYMEX) -  $71.81  //  $0.62 //  0.87%

The wave of risk aversion has receded; but the general current towards unwinding speculative positions was maintained across the capital markets Monday. For crude oil, one of the trading community’s favorite commodities to speculate on, the critical technical break below $72.50 this past Friday has shifted the market’s indulgences for anything bullish to everything bearish. Therefore, while there are have been stories about harsh weather descending on the United States and intensifying political pressures in Iran; the preoccupation with global financial threats like European sovereign debt troubles is kept front and center. Scanning for the next, prominent catalyst for risk aversion trends, there is still a preoccupation with the contagiousness of Greece’s credit troubles. It may be difficult to make the connection between a default or deficit above the EU’s limit and the activity of the oil market; but after the financial and credit crisis of late 2008, the caution is understandable. Looking out over the rest of the week, the next general fissure in sentiment is hard to spot. In fact, if exogenous event risk can hold off, a relatively light economic docket may allow for a gradual retracement of recent losses. For now, the 200-day SMA (near $70.75) and the $72.50 pivot level mark the boundaries of indecisiveness.

In the absence of a clear push or pull from risk appetite trends this week, there are clear supply-and-demand threats on the horizon. Iran sent a letter to the UN’s International Atomic Energy Agency indicating its intentions to step up uranium enrichment to power a medical research reactor in Tehran. Moreover, though the country has expressed its intentions to open its operations once again to UN inspectors, the global community is skeptical about the countries intentions. With the US bolstering its naval presence in the region, the crude output from this major producer will be closely monitored. In the United States, the weather may be looking once again to provide some balance to consumption and inventory levels. This past Saturday, the Eastern coast was battered by the worst blizzard on recent record. According to weather services, another crippling storm is expected Tuesday night into Wednesday morning. With 12-18 inches of snow expected in the hub around New York City and temperatures forecasted to fall below the average across most of the United States between February 13th and 17th, we could see a well-timed shift in focus among energy traders.

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Commodities – Metals

Gold and Silver await a Fresh Catalyst below Eminent Former Support

Spot Gold  -  $1,065.20   //  -$1.10 //  -0.10%

Metals struggled to produce a meaningful recovery Monday; but tempered volatility wouldn’t translate into improved sentiment. Gold prices edged higher in the early session trading; but activity was clearly diminished from last week’s levels. In fact, open interest levels would drop to their lowest levels since October through Monday’s session. In addition, while this small-range day would leverage greater prominence to Friday’s significant reversal; it would also prevent the commodity from overtaking the closely monitored $1,075 mark that was so difficult to break as support these past few months. As for fundamental drive behind the market, the preoccupation with credit problems for European Union members would both keep the metal from a meaningful recovery and stabilize price action. While it is not exactly clear what the fallout would be should Greece not be able to meet its deficit goals, global investors are not willing to take the chance with the potential repercussions with credit markets still in a fragile state. For gold, this weighs on its speculative value and further as its role as a dollar hedge (as the greenback is finding safety flows). The relationship between the dollar and gold is particularly important because it helps define whether the metal’s role as a speculative or safe haven asset is more prominent.  Looking ahead, there is speculation that physical demand could pickup for the weeklong Chinese Lunar New Year beginning on February 14th; but this dynamics influence over price action will fully demand on the market’s preoccupation with risk trends.

Spot Silver  -  $15.09 //  -$0.08 //  -0.53%

Silver wouldn’t put in for a new five-month, intraday low Monday; but the commodity would put in for its lowest close in that same time span. The general drop in volatility across the capital markets would have the same tempering effect on silver. Putting it for its fourth consecutive daily decline, the metal has extended its three-week bear trend to a 21 percent decline. Looking at the US dollar (the primary pricing tool for the commodity), its fourth daily advance sets a clear precedence. With a diminished role as a meaningful dollar or inflation hedge and little interest as a safe haven, silver will maintain a high correlation to general risk appetite trends.

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