Fundamentals

Has Crude Taken the First Step Towards a Breakout and Reversal?

North American Commodity Update

Crude Oil (LS NYMEX) -  $81.21   //  -$0.90  //  -1.10%

Volatility perked up modestly for the active NYMEX crude contract Friday such that the market would test a new eight-week high of $83.16 before reversing course and potentially forging a bearish breakout. With the week’s close pulling the market below a trendline that has guided the commodity upward for over a month now, a speculative barrier has been removed. What is needed now is momentum; and such conviction will likely come through risk appetite itself. As it stands, the market’s level of activity (measured through the rolling 20-day average daily range) is still near its lowest level since September of 2007. However, the CFTC’s Commitment of Traders figures reported a 17,897-contract increase in net long speculative positioning through the period ending March 9th. Furthermore, aggregate open interest for the commodity on New York futures exchange has steadily climbed to its highest level since June of 2008. Interest is building; but market participants are awaiting a clear bearing before committing. Therefore, the end-of-the-week break that is so clear on the chart must still be considered a tentative move; because risk appetite was ultimately little moved through the session and the US dollar actually tumbled itself (the commodity and currency often move inversely due as the dollar is oil’s primary pricing instrument).

Ultimately, when the next solid trend does form, it will likely follow wherever investor sentiment leads. However, risk appetite itself has significant fundamental pressure from economic data on the backend. Specifically, should fear and uncertainty take over, there is more than enough reason to unwind speculative positioning. Today, the headline macro data was somewhat mixed. Retail spending in the world’s largest economy rose 0.3 percent against speculation of a contraction. On the other hand, the University of Michigan consumer confidence report unexpectedly eased back from a two-year high. These changes were relatively modest and do not definitively alter their respective trends of improvement. Taking a broader look at demand, the International Energy Agency revised its forecast for global oil demand for the year by 70,000 barrels to 86.6 million barrels per day. Further noteworthy in this release was the 1.7 million barrel increase to emerging market consumption to 41.2 million barrels per day. Economic expansion across the globe has developed more clearly outside the developed bloc; and top amongst this group is China, which is also the second largest consumer of fuel in the world. This is a link that will certainly not be overlooked going forward as the Chinese government attempts to cool its markets and economy to avoid a potential asset bubble. And, through this economic link, we loop once again back to the influence risk appetite has on the market as sentiment has so far held up despite building pressure for policy makers in the economy to act upon.

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

Spot Gold  -  $1,102.11   //  -$7.39 //  -0.67%

It was an unusual end to the week for gold bugs. Through the close, the risk appetite was little changed while the US dollar was tumbling ; and yet, the precious metal was also on the decline. This is an unusual mix considering gold’s two most elemental roles in the financial market through recent history were as a speculative instrument and dollar-hedge. This divergence is most likely the mix of two key developments. The first consideration that market activity itself has become so stagnant that the correlation that has bound these markets together is loosening. A second issue is the deterioration of fundamentals in the background (despite the relatively stable condition of other growth-sensitive markets). Concerns about the stability of the Euro Zone, financial stability of China and sovereign credit ratings of the world’s largest players have all increased with time. So, while this metal has a value through its function as a safe haven by acting as an alternative to fiat currency; it could be considered too expensive and volatile to reliably play the role of a clear hedge. Looking at speculative interest, the COT report revealed speculators increased their long exposure on the COMEX by 822 contracts on to a net 208,194 contacts. At the same time, the delayed volume data on the active futures contract shows the highest level of activity, at a turnover of 236,000 contracts, since the February 5th plunge and reversal. We will see what leading fundamental driver takes precedence in the near future as the market finds its course for risk appetite.

Spot Silver  -  $17.08   //  -$0.10  //  -0.58%

Where other commodities would put in for a relatively active day Friday (compared to recent history); silver would exhibit little progress or volatility. Once again, we are presented with a clear reflection of the primary catalysts for this precious metal. As a speculative instrument, the lack of activity on the Dow Jones Industrial Average (our standard-bearer for risk appetite) gave little impetus for this commodity to stray in otherwise quiet markets. However, the permanent link to the US dollar would offer a modest increase in volatility, though direction would not match what EURUSD would suggest. For speculative interest, futures volume rose to its highest level in three weeks on turnover of 47,681 contracts Wednesday. Furthermore, the COT numbers showed a 4,107-contract increase in the net speculative long balance to a 35,165 total.

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

Risk Appetite and Data Support Crudes Surge to New Highs Yet Conviction Does Not Hold

North American Commodity Update

Crude Oil (LS NYMEX) -  $81.85   //  $0.36  //  0.44%

Risk appetite, macro data and supply-and-demand statistics seemed to align for bullish crude traders. Yet despite begin given the fundamental green light (and notably still backed by impressive buying momentum over the past month), the active crude futures contract on the NYMEX was forced to retrace its morning thrust to a fresh, eight-week high just above $83. Whether using a fundamental, technical, sentiment or hedge-based trading approach, every active market participant is conscious of the $84 swing high set back on January 11th and its status as a 16-month high for the market. Surpassing this level could easily banish uncertainty and encourage sidelined investment; but truly extending a bull trend for this commodity will require a broad improvement in investor sentiment and a clear shift in production and consumption fundamentals. As for sentiment, the dollar was lower and equities were modestly higher; but it was obvious that the sparks of risk appetite are not catching. Whether a turn in the markets itself or a prominent economic catalyst is responsible for the inevitable restoration of speculative interest remains to be seen.

For actual drive, today’s fundamentals offered the better source of momentum – though this wouldn’t actually pan out as one would expect. Through the morning, the top headline was the report from China that its exports had surged 46 percent – suggesting global activity was accelerating and economies would require fuel to keep the expansion in place. During the European hours, there were two conflicting reports. Germany reported its crude reserves were 20 percent larger than initially estimated due to deposits reported in the Upper Rhine region. Counteracting this potential supply boost from Europe’s largest economy, OPEC raised its global consumption expectations for the year and upgraded its output projections by 190,000 barrels to 28.94 million barrels per day. Come the active US trading session, traders had hoped that the US Department of Energy inventory figures would be able to break the offsetting nature of the early data. Following the yesterday’s 6.5 million barrel increase from the API report, expectations were probably set higher for the DoE account than the 2.0 million rise expected. In fact, the 1.432 million barrel pickup through March 5th was smaller than expected; and there was a notable 3.181 million barrel and 2.796 million barrel contraction in gasoline and distillate inventories respectively. Furthermore, total fuel consumption rose 0.2 percent to an August high 19.7 million barrels. Nevertheless, with this weekly increase, we have see the longest period of expansion in crude holdings since May and the highest overall stockpiles at 353 million barrels since August.

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

Spot Gold  -  $1,107.66   //  -$14.19 //  -1.26%

It seemed a dichotomy in nature. The US dollar was on the retreat and China reported remarkable levels of inflation; and yet, gold would tumble on the day. In fact, the commodity was little changed through most of the session; but there was a remarkable swing during the early trading hours of the US session that measured 2.7 percent in a mere two hours. This jump in activity notably pushed the market to lows not seen in over a week and ultimately broke a loose but untested rising channel for the past month.  For fundamental encouragement, the precious metal had a few contradictory dynamics to account for. Running astray of the commodity’s role as a dollar hedge, the decline in the US dollar through much of the day ultimately roused little impetus for price action. Furthermore, the currency’s penchant for playing safe haven seems to fit the assurances of former EU Commission President Prodi who suggested the Greece crisis had passed and other European economies would not follow in its path. However, there are two inconsistencies here. First, Prodi is no longer standing President; so he is entitled to black-and-white assessments; and gold itself has recently taken on a value of safe haven asset due to its value as an alternative to fiat currency with sovereign debt risk as inflated as it is. In the end, neither risk appetite nor credit stability were particularly strong; and long-standing concerns are still certainly engrained. Another questionable driver was China’s report of inflation. The government reported home prices grew at their fastest pace in nearly two years in recent data. This would seemingly support a demand for gold as an inflation hedge; but the implications this price growth has for an asset bubble and instability in the Chinese economy more than compensates for the bullish sentiment that can be derived from this data.

Spot Silver  -  $16.98   //  -$0.28  //  -1.62%

Just as surely as the dollar would retrace its gains yesterday, the currency would recover much of its losses today. In the end, this would leave highly-sensitive silver with a mute, dominant fundamental driver. From speculative readings, equities and other key markets were slowly building in favor of growth-linked performance. Nonetheless, this precious metal would take its cues from gold and close its worst daily performance in two weeks. Looking at speculative demand, iShares (the largest ETF backed by silver) reported its holdings were unchanged at 9,351 tons following two sales of 61 tons a piece over the past week.

Discuss gold and oil trading with other traders in the DailyFX Forum

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

Oil May Finally Break Support Amid Chinese Tightening Fears

Commodities – Energy

Oil May Finally Break Support Amid Chinese Tightening Fears

Crude Oil (WTI)       $81.58       -$0.51 -0.62%
Prices remain wedged between resistance at $82.23 and a rising trend line established from the bottom in early February. The percent-change correlation between the WTI contract and the MSCI World Stock Index remains significant at 0.78, reflecting the strong influence of risk sentiment. Trading is mixed on European exchanges but US index futures are trading lower, pointing to a “risk off” day on Wall Street. China’s inflation figures look to be the catalyst for selling after a report showed that Consumer Prices rose 2.7 percent in the year to February, putting the annual inflation rate at a 16-month high and sparking fears that Beijing will step up efforts to clamp down on credit growth. Chine is the world’s second-largest crude consumer, so a material slow-down there would bode quite ill for prices. A break lower exposes $77.53. Weekly US Jobless Claims and Trade Balance figures headline the economic calendar going forward.

Commodities – Metals

Gold, Silver Likely to Extend Losses on US Yield Outlook

Gold       $1107.45 -$0.96 -0.09%
Gold prices have taken out support at a rising trend line established from February’s swing low, with continued selling to see barriers emerging at the $1100 figure. Firming US yield expectations continue to weigh on prices. Curiously, gold seems to be developing a firming inverse correlation with the spread between yields on 3-year and 2-year US Treasuries, potentially hinting the market expects the jump in borrowing costs from financing the massive US deficit to filter through somewhere between 2012-13. A Credit Suisse gauge tracking the priced-in outlook for Fed rate hikes over the next 12 months has also jumped by just over 2 basis points for the second consecutive day, suggesting the yellow metal may remain under pressure.

Silver $16.96 -$0.06 -0.37%
As yesterday, the outlook for silver is largely in line with its more expensive counterpart as traders push inflation-hedge assets lower amid firming US yield expectations. Prices dropped to support at $16.86, with a break beyond this boundary exposing $16.31.

Risk Appetite and Data Support Crudes Surge to New Highs Yet Conviction Does Not Hold

North American Commodity Update

Commodities – Energy

Risk Appetite and Data Support Crudes Surge to New Highs Yet Conviction Does Not Hold

Crude Oil (LS NYMEX) –  $81.85   //  $0.36  //  0.44%

Risk appetite, macro data and supply-and-demand statistics seemed to align for bullish crude traders. Yet despite begin given the fundamental green light (and notably still backed by impressive buying momentum over the past month), the active crude futures contract on the NYMEX was forced to retrace its morning thrust to a fresh, eight-week high just above $83. Whether using a fundamental, technical, sentiment or hedge-based trading approach, every active market participant is conscious of the $84 swing high set back on January 11th and its status as a 16-month high for the market. Surpassing this level could easily banish uncertainty and encourage sidelined investment; but truly extending a bull trend for this commodity will require a broad improvement in investor sentiment and a clear shift in production and consumption fundamentals. As for sentiment, the dollar was lower and equities were modestly higher; but it was obvious that the sparks of risk appetite are not catching. Whether a turn in the markets itself or a prominent economic catalyst is responsible for the inevitable restoration of speculative interest remains to be seen.

For actual drive, today’s fundamentals offered the better source of momentum – though this wouldn’t actually pan out as one would expect. Through the morning, the top headline was the report from China that its exports had surged 46 percent – suggesting global activity was accelerating and economies would require fuel to keep the expansion in place. During the European hours, there were two conflicting reports. Germany reported its crude reserves were 20 percent larger than initially estimated due to deposits reported in the Upper Rhine region. Counteracting this potential supply boost from Europe’s largest economy, OPEC raised its global consumption expectations for the year and upgraded its output projections by 190,000 barrels to 28.94 million barrels per day. Come the active US trading session, traders had hoped that the US Department of Energy inventory figures would be able to break the offsetting nature of the early data. Following the yesterday’s 6.5 million barrel increase from the API report, expectations were probably set higher for the DoE account than the 2.0 million rise expected. In fact, the 1.432 million barrel pickup through March 5th was smaller than expected; and there was a notable 3.181 million barrel and 2.796 million barrel contraction in gasoline and distillate inventories respectively. Furthermore, total fuel consumption rose 0.2 percent to an August high 19.7 million barrels. Nevertheless, with this weekly increase, we have see the longest period of expansion in crude holdings since May and the highest overall stockpiles at 353 million barrels since August.

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

Commodities – Metals

The Dollar Drops and Chinese Inflation Accelerates while Gold Tumbles

Spot Gold  -  $1,107.66   //  -$14.19 //  -1.26%

It seemed a dichotomy in nature. The US dollar was on the retreat and China reported remarkable levels of inflation; and yet, gold would tumble on the day. In fact, the commodity was little changed through most of the session; but there was a remarkable swing during the early trading hours of the US session that measured 2.7 percent in a mere two hours. This jump in activity notably pushed the market to lows not seen in over a week and ultimately broke a loose but untested rising channel for the past month.  For fundamental encouragement, the precious metal had a few contradictory dynamics to account for. Running astray of the commodity’s role as a dollar hedge, the decline in the US dollar through much of the day ultimately roused little impetus for price action. Furthermore, the currency’s penchant for playing safe haven seems to fit the assurances of former EU Commission President Prodi who suggested the Greece crisis had passed and other European economies would not follow in its path. However, there are two inconsistencies here. First, Prodi is no longer standing President; so he is entitled to black-and-white assessments; and gold itself has recently taken on a value of safe haven asset due to its value as an alternative to fiat currency with sovereign debt risk as inflated as it is. In the end, neither risk appetite nor credit stability were particularly strong; and long-standing concerns are still certainly engrained. Another questionable driver was China’s report of inflation. The government reported home prices grew at their fastest pace in nearly two years in recent data. This would seemingly support a demand for gold as an inflation hedge; but the implications this price growth has for an asset bubble and instability in the Chinese economy more than compensates for the bullish sentiment that can be derived from this data.

Spot Silver  -  $16.98   //  -$0.28  //  -1.62%

Just as surely as the dollar would retrace its gains yesterday, the currency would recover much of its losses today. In the end, this would leave highly-sensitive silver with a mute, dominant fundamental driver. From speculative readings, equities and other key markets were slowly building in favor of growth-linked performance. Nonetheless, this precious metal would take its cues from gold and close its worst daily performance in two weeks. Looking at speculative demand, iShares (the largest ETF backed by silver) reported its holdings were unchanged at 9,351 tons following two sales of 61 tons a piece over the past week.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist

Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Oil, Gold May Decline as Monthly US Deficit Hits Record

Commodities – Energy

Oil May Break Support as Monthly US Deficit Hits Record

Crude Oil (WTI)       $81.25       -$0.24 -0.29%
Prices have pulled back from resistance at $82.23 to find support at a rising trend line established from the bottom in early February, with a break lower exposing $77.53. The percent-change correlation between the WTI contract and the MSCI World Stock Index has strengthened to 0.78, reflecting the increasing influence of risk trends. European shares and US index futures are going nowhere fast, leaving crude without a clear catalyst heading into the Wall St open. The US Treasury’s monthly budget statement may prove to be the most significant item on the calendar, with expectations calling for a monthly shortfall of -$222 billion in February – the largest since records began nearly 33 years ago. This send crude lower as investors bet that the unprecedented borrowing that will be required to finance the US’ public deficit will send borrowing costs sharply higher, snuffing crude demand along with overall economic growth. The US Department of Energy’s Weekly crude inventory and MBA Mortgage Applications figures are also on the docket.

Commodities – Metals

Gold, Silver to See Sellers Return on US Debt Outcome

Gold       $1122.73       +$0.88       +0.08%
Gold prices found support at a rising trend line established from February’s swing low and rebounded to re-test support-turned-resistance at $1125.13. As with oil, the US monthly budget figures may weigh heavily on prices if they prove to fuel expectations of a sharp increase in borrowing costs that bears down on inflation. A break below the trend line will initially target the $1100 figure.

Silver       $17.31       +$0.06       +0.32%
The outlook for silver is largely in line with its more expensive counterpart, with traders’ eyes trained on the US monthly budget statement. Prices have rebounded from support just below the $17.00 to re-test resistance near the previous swing high at $17.51, with a turn lower form here initially looking to challenge $16.86.

Crude to Follow Risky Assets Lower, Gold Trading on US Yield Outlook

Commodities – Energy

Crude Oil May Extend Losses on Fading Risk Appetite

Crude Oil (WTI)       $81.03 -$0.84 -1.03%
Prices have pulled back from resistance at $82.23 to find support above the previously broken upper boundary of a Rising Wedge formation (now at $81.26). The US economic calendar is fairly light once again, with only the Department of Energy set to release their short-term crude outlook figures while the American Petroleum Institute publishes weekly inventory data. On balance, risk sentiment may prove to be the guiding catalyst once again. Indeed, the percent-change correlation between the price of the WTI contract and the MSCI World Stock Index remains elevated at 0.76. European shares are trading lower and US index futures are firmly in negative territory, making such an outcome supportive of a bearish scenario. A break below current support will expose the $80 figure.

Commodities – Metals

Gold, Silver to Decline on Firming US Yields Outlook

Gold $1120.08 -$3.48 -0.31%
Gold turned lower from support-turned-resistance at a rising trend line established from the swing bottom in early February, finding support at $1118.60. The outlook for US interest rates appears to have taken over as the primary near-term catalyst. Indeed, the 20-day correlation of gold with the spread between the yields on 12-month and 1-month Treasury notes now stands at -0.60, suggesting continued selling is ahead of the market’s perception of the Fed continues to adjust toward a more hawkish posture than previously expected. A push below current support exposes the $1100.00 figure.

Silver $17.09 -$0.16 -0.90%
As with gold, US interest rate expectations appear to be the primary driver of price action in the near term. Indeed, the silver’s inverse correlation with the spread between 12-month and 1-month Treasury yields stands at -0.69, a reading even higher than the precious metal’s more expensive counterpart. Technically, a Bearish Engulfing candlestick formation below resistance at a rising trend line connecting major swing highs from early February has marked the beginning of a move lower, with a break of initial support at $16.80 exposing the $16.00 figure.

Crude Edges Ever Higher as Momentum Substitutes Fundamental Drive

North American Commodity Update

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.

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

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.

Discuss gold and oil trading with other traders in the DailyFX Forum

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

Crude Elicits another Swing of a Tight Range as Risk Trends Clash

North American Commodity Update

Commodities – Energy

Crude Elicits another Swing of a Tight Range as Risk Trends Clash

Crude Oil (LS NYMEX) –  $78.81  //  -$0.85 //  -1.07%

Volatility behind oil futures was relatively tame throughout Monday aside from a brief period during the early afternoon hours of the US session. Nonetheless, this short-lived move was momentous enough to span a frequented range loosely established between $80.50 and $78. This is a relatively modest range considering the level of volatility behind price action. This combination of high activity and limited room to run reflects the indecision in investor expectations for risk appetite; but technically and fundamentally, it is also a sign that something will have to give soon. For fundamental impetus this morning, there was a distinct departure from correlation between crude and underlying sentiment trends. Through all three major sessions (Asian, European and US) on Monday, equities were on the advance – though the pace was relatively restrained. The popular consensus among market commentators is that the advance in stocks was reflective of confidence behind a meaningful resolution to potential crises developing in the Euro Zone and UK. Yet, a tumble from the euro and pound discard this theory. In reality, there was little consistency in underlying sentiment across the various asset classes; and these particular circumstances likely allowed oil to adopt the universally high-level of volatility while allowing the commodity to defer to its own technicals and fundamentals for direction (or lack thereof).

For supply-and-demand considerations, there were many big-ticket economic releases on which to refine expectations for economic activity. Offer the most straightforward read on oil consumption forecasts, the series of February manufacturing sector activity reports would disappoint. Among the headlines this morning, the biggest drop from the US ISM factory activity gauge in 14 months and a year-low in the Chinese counterpart to this report indicated a cooling in production efforts from the world’s two largest energy consumers. In other news, the US reported an improvement in consumers spending – which accounts for more than three-quarters of the economy. Spending through January rose for a fourth consecutive month by 0.5 percent. These are promising figures; but in truth their influence on demand for crude has already been factored into the commodity’s fair value. From this standpoint, tomorrow’s API inventory figures and Wednesday’s DoE numbers will offer a more lasting influence on the equilibrium between supply and demand. This is especially true for the government’s report considering the consensus for a fifth weekly increase in stockpiles of 1.05 million barrels would mark the long period of expansion since the period ending May 1^st.

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

Commodities – Metals

A Rally from the Dollar and Dow Keeps Gold Little Changed Monday

Spot Gold  -  $1,118.05  //  $0.45 //  0.04%

It is unusual to see gold carving such a small range while the other speculative benchmarks have developed impressive levels of volatility; but this reserved pace does have its fundamental groundings. Looking at a chart of the precious metal, Monday’s range was the smallest seen since February 15^th. From a technical perspective, this can be described as stalled momentum in the face of a closely monitored $1,125 figure. Alternatively, looking at the economic dynamics of this tempered pace, we see some of the market’s primary drivers offering conflicting bearings. For gold’s role as a speculative asset, equities would advance steadily through the day. On the other hand, the metal’s function as a dollar-hedge would work against it as the currency established hearty gains against key counterparts through the early hours of the US session. Considering the greenback frequently follows its role as a safe-haven currency, this divergence between risk trends and dollar under high volatility conditions is unusual. As the week wears on, these various roles will likely realign themselves and a clear bearing on risk appetite will put the gold back on trend. In the meantime, perhaps the collection of central bank rate decisions (starting with the RBA’s meeting early in Tuesday’s Asian session) can develop the argument of whether fiat currency or precious metal represents the better store of wealth.

Spot Silver  -  $16.46   //  -$0.02  //  -0.12%

Silver has a dual role among the fundamental crowd. As a precious metal, there is a clear value as a speculative instrument. On the other hand, it also maintains an industrial use as affordable metal. This unique position doesn’t often lead to significant imbalances because its economic use is usually dwarfed by the volatility behind risk sentiment trends. However, a sharp rally in copper prices this morning in response to the earthquake in Chile (the world’s largest producer of the metal) would lead to a meaningful advance in the base metals complex. At its day high, silver was pushing a record high; but a retracement in copper and relatively strong dollar would eventually lead silver to a modest change for the day.

Discuss gold and oil trading with other traders in the DailyFX Forum

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

Oil, Gold Threatened as Greece Sinks Risky Assets

Commodities – Energy

Oil Prices Threaten Support as Greek Downgrade Threat Sinks Risky Assets

Crude Oil (WTI)        $79.53       -$0.47       -0.59%
Technical positioning is essentially unchanged from yesterday: prices at the bottom of a rising channel set from the swing low established earlier this month (now at $79.17), with a break lower exposing horizontal support at $77.53 and ultimately the $76 figure. The push lower may be catalyzed as risky aversion makes a comeback in the wake of comments from ratings powerhouse Standard & Poor’s, who said that they may downgrade Greece again by the end of March. This comes on the heels of yesterday’s downgrade of Greece’s four top banks by Moody’s. The issue has also been compounded by comments from Greek Deputy PM Theodoros Pangalos, who told the BBC that Germany has no right to criticize his country after devastating it under the Nazi occupation, adding that the current crop of EU leaders are of “very poor quality” and unfit to manage Europe’s fortunes. Such outbursts will make it all the more difficult for Western Europe to sell a Greek bailout to its electorates, who are already upset with the idea of spending their tax money to finance southern Europe’s spendthrift policies, making the likelihood that the troubled region is left to its own devices significantly more likely. The prospect of a sovereign default with the Euro Zone has sent investors fleeing out of risky assets, with stocks broadly lower in Asia as well as opening in the red in Europe. US equity index futures are likewise in the red, hinting that oil may mount a push lower considering the near-term percent change correlation between crude and the MSCI World Stock Index stands at a firm 0.91. January’s US Durable Goods Orders and weekly Jobless Claims figures headline the economic calendar.

Commodities – Metals

Gold, Silver to Extend Losses as Risky Aversion Gains Momentum

Gold       $1091.90       -$5.85        -0.53%
Prices have taken out range support at $1101.16, with the door now open for a move to resistance-turned-support at the top of a falling channel established from January’s swing high (now at $1073.21). As with oil, the turmoil in Greece promises to encourage further losses as the near-term percent change correlation between the yellow metal and the MSCI World Stock Index remains significant at 0.75.

Silver       $15.75       -$0.22       -1.39%
Technical positioning is unchanged from yesterday: are trading sideways above horizontal support at $15.68, with near-term resistance at the bottom of a previously broken rising channel set from the swing low set earlier this month. The correlation between the cheaper precious metal and the MSCI World Stock Index matches that of its more expensive counterpart at 0.75, suggesting bearish momentum is set to resume. A break past current support exposes considerable downside potential toward the $15.00 figure.

Oil, Gold to Rise With Risky Assets Ahead of Bernanke Testimony

Commodities – Energy

Oil May Rise on Risk Recovery Ahead of Bernanke Testimony

Crude Oil (WTI)       $79.14        +$0.28       +0.36%
Prices have dropped to the bottom of a rising channel set from the swing low established earlier this month (now at $78.48), with a break lower exposing horizontal support at $77.53 and ultimately the $76 figure. European and US equity index futures are trading higher, with risky assets supported ahead of ahead of upcoming congressional testimony from Federal Reserve Chairman Bernanke. The US central bank chief is expected to play down last week’s discount rate increase as “normalization” that is not intended to signal that the benchmark fed funds lending rate will rise faster than previously expected, assuaging fears that premature removal of monetary stimulus will derail economic recovery. This may help engineer a bit of a rebound considering the percent-change correlation between crude and the MSCI World Stock index stands at a formidable 0.90, hinting that risk sentiment remains a potent driver of price action. A firmer set of US New Home Sales figures in January is also supportive of an advance considering the America’s construction sector is the world’s single largest crude consumer. The Department of Energy’s weekly inventory data rounds out the economic calendar.

Commodities – Metals

Gold, Silver May Correct Higher as Risk Appetite Recovers

Gold       $1104.59       +$1.19       +0.11%
Prices have moved lower to the bottom of the recent range at $1101.16, with a break lower exposing resistance-turned-support at the top of a falling channel established from January’s swing high (now at $1075.84). As with oil, a bounce higher from here seems plausible as markets get ready for Bernanke’s congressional testimony and equity index futures tick higher both in Europe and the US, pointing to signs of life across the spectrum of risky assets.

Silver       $15.85       +$0.02       +0.11%
Silver has broken down past support at the bottom of a rising channel set from the swing low set earlier this month, pausing ahead above horizontal support at $15.68. A break below this level exposes considerable downside potential toward the $15.00 figure, although firmer risk appetite suggests an upswing is in the cards near-term with resistance at the broken channel bottom (now at $16.20).

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