Fundamentals

Crude Edges Ever Higher as Momentum Substitutes Fundamental Drive

North American Commodity Update

Commodities – Energy

Crude Edges Ever Higher as Momentum Substitutes Fundamental Drive

Crude Oil (LS NYMEX) -  $81.82   //  $0.32  //  0.39%

There was relatively little for fundamental traders to work with Monday; but that wouldn’t prevent oil from pushing a new eight-week high and closing the gap to the $84 swing high set on January 11th. At this point, the bullish bias can sustain itself on sheer momentum as long as there isn’t an active force to fight the market’s climb. In fact, over the past month, the nearby crude futures contract has climbed 15 of the 20 active trading days and advanced over 18.5 percent. On the other hand, the high volume levels that supported the initial bearish reversal have notably cooled while the CBOE Crude Oil Volatility Index has held below the one and three-month average around 35 percent. Nonetheless, the CFTC’s Commitment of Traders report revealed a growing interest amongst the speculative crowd with net longs rising a third week to 91,400 contracts.

Yet, speculative interests will not go unchallenged going forward. This morning, wariness over the financial stability of Greece and the Euro-area was further tempered by French President Sarkozy’s vow that the EU was prepared to support the ailing member should it need assistance. Furthermore, officials are reportedly working to create a European Monetary Fund that could be used to extend loans to Union members without inviting moral hazard or require nations to go outside the group to appeal for assistance. The timing for such an ambitious plan is critical however as a crisis before the fund can be implemented would be far more difficult to fix than prevent. Another concern that has not yet hit critical mass is the development of an asset bubble in China. Officials recently announced that all loan guarantees that were made on the part of local governments would be nullified and future assurances would be banned. It is speculated that a considerable percentage of 2009’s momentous build in lending was established through just such means, meaning the probability of default was much greater. Considering this booming speculative market is thought to have already been on the cusp of an asset bubble, this development could finally lead to a dramatic unwinding of overwrought capital markets. From sentiment to supply concerns, forecasts for inventory figures are already calling for a sixth consecutive increase in US reserves. According to Bloomberg’s poll, economists expected a 2 million barrel increase through the week ending March 5th. This would extend the longest strength of gains since May and further extend stockpiles that are already at their highest level since August at 341.6 million barrels.

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Commodities – Metals

Despite Stable Risk Appetite Trends, Gold Suffers a Significant Correction

Spot Gold  -  $1,121.55  //  -$13.10 //  -1.15%

As testament to the relatively restrained volatility over the past few weeks (and the consistency of the controlled bullish bias); spot gold suffered its sharpest decline in a month Monday. Historically, this downdraft isn’t particularly sharp. Nonetheless, slipping below $1,130 has disrupted the market’s forward momentum. Furthermore, the 1.2 percent decline in the precious metal stood out amongst other asset benchmarks that were comparatively little changed for the day. Where did this wave of selling come from? The commodity has established a function that has traded back and forth between speculative asset and alternative investment to traditional fiat currencies. Over the past few weeks, the commodity has enjoyed an advance alongside equities but contradictory to the tepid sense of risk appetite that has developed in the background. For this asset to enjoy the trappings of a speculative asset, investors will have to be encouraged by fresh 12 to 16 month highs from the benchmarks from the various security classes. Looking at the COT data for last week’s positioning, net speculative interest on the COMEX rose for a fourth week to 207,400 contracts. Alternatively, a rebound in sentiment would naturally counteract gold’s appeal as a safe haven. This morning, news circulated that the EU was working to establish a lender-of-last-resorts program that would act like an IMF for the European region to avoid crises within the group. However, this does not immediately answer all the market’s troubles. The removal of stimulus, cracks in sovereign debt risk and overvalued markets make for rough financial terrain over the coming months and quarters.

Spot Silver  -  $17.21   //  -$0.15  //  -0.86%

Silver suffered its sharpest decline in 9 days Monday as the dollar stalled in its advance and gold guided the precious metals complex lower. Looking at market activity behind futures, delayed volume on the active silver contract traded on the COMEX reveals the advance of the past week was backed by relatively restrained turnover. On the other hand, open interest maintained its advance from late February lows. According to COT data, speculative positioning accounted for 23.3 percent of open interest this past week from 19.3 percent reported in the previous reading.

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