Fundamentals

An Intraday Reversal in Risk Appetite Salvages Crude from Steep Morning Losses

North American Commodity Update

Crude Oil (LS NYMEX) -  $69.94   //  -$0.27   //  -0.38%

Beginning in the early Asian session and continuing through to the pre-US open trading hours, crude would pitch into a selling trend that would build in intensity as European liquidity slowly filtered into the market. In fact from Monday’s US session close, the active WTI futures contract would topple an impressive 4.36 percent by the time the New York exchange would come on line. This momentous decline (and the subsequent recovery) was heavily influenced by the temp that risk aversion would set for the broader speculative markets. For contrast, the Japanese Nikkei 225 and UK FTSE 100 would both tumble more than three percent through their respective sessions; government bonds for the stalwart industrialized economies met significant demand; and safe havens like the US dollar and gold would swell with the influx of wealth that was fleeing the risk implied in fundamentally unstable capital markets. What was driving this particularly flight to safety?  Media would assign the blame to tensions in North Korea and new developments in the European Union’s financial crisis. However, sentiment had already established its bias long before. In reality, these new issues are simply new sparks to activate a preconceived desire to unwind risky positions. This better explains the intraday reversal in sentiment and crude that carried the benchmark to a nearly unchanged status for the day. Without real fundamental fodder to genuinely raise the threat level of a large or even global financial crisis, there is a lack of conviction in taking the next step towards longer-term bearish trends.

Turning from the whiles of sentiment to more objective market influences, the discrepancies between contracts and crude types has notably diminished. Looking at the NYMEX contango (the condition where the deferred futures contract is more expensive than the active nearby), the difference between the contracts for July and August expiration has narrowed to $1.35 (from a 15-month high of $4.59 set just two weeks ago). More importantly for potential arbitrageurs who believed the benchmark US WTI grade was artificially deflated by an inventory build up in Cushing, Oklahoma; the premium that the Brent contract has held for two months now stands at a much more bearable $0.80 (from nearly $7 just a few weeks ago). What does this mean for traders? Market functioning is improving for the crude market. Yet, that does not negate the influence of larger fundamental concerns. The demand/supply balance was altered by a few prominent economic indicators released through the day. The second reading of the UK’s 1Q GDP report was in line for its headline figures; but the component figures suggested growth (and thereby energy demand) was better positioned than previously thought.  Investment would unexpectedly grow 1.5 percent through the period while personal consumption was. In the US, the Conference Board’s consumer sentiment survey for May advanced to a near two year high as Americans responded to economic stability and a tentative improvement in labor conditions. These are still very early signs of economic strength (and certainly not what is needed to put pressure on supplies); but they are necessary first steps. Speaking of supplies, the API inventory report for the period ending May 21st would report a modest increase in holdings of 616,000 barrels. This is in line with tomorrow’s DoE forecasts.

Commodities – Metals

Spot Gold -  $1,204.25  //  $12.60  //  1.06%

For most speculative assets (regardless of their position on the risk spectrum), the intraday shift in sentiment would lead to a wide range and comparatively modest daily change. Not so for gold. Avoiding much of the volatility that drove more reactive assets on dramatic swings, the precious metal carved a steady advance that would lead it to a close near the day’s high through the end of the US session. The rebound in investor sentiment through the US session was wide spread; and the initial tumble in speculative interests through the morning was encouraged by a range of tangible concerns. So, then would this particular asset not conform? The unique performance from gold can be traced back to its appeal amongst international investors. More than just an easy safety play for the highly leveraged, this commodity is being treated as a long-term alternative to global currencies, government debt and hedge for the early threat of inflation. As such, investors are concerned about the steady deterioration in Euro-are markets by Germany’s proposal for broad naked short sales and the geopolitical uncertainties brought on by the growing hostilities between North Korea and much of the rest of the world. Alternatively, long-term convictions do not guarantee security with a buy-and-hold strategy for gold. The CBOE Gold Volatility Index suggests the metal could see a 25.7 percent move over the coming months, compared to the 34.6 percent reading on the S&P 500’s VIX volatility index and 15.1 percent outlook from the DailyFX currency volatility measure.

Spot Silver  -  $17.95   //  $0.04  //  0.22%

As gold sees its daily momentum ebb, silver’s correlation will similarly wane. The cheaper precious metal cut a bearish recovery similar to that of the Dow through Tuesday’s session. At the same time, the intensity of the move was certainly ratcheted down from that of equities or oil. Perhaps the dollar’s temperate retracement helped keep the market under control or the stability of gold would dissuade rampant speculation. Nonetheless, both open interest and volume for the continuous contract declined through last week’s close (the exchange releases delayed activity data) as commodity approached a range low of $17.40/00.

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

As Sentiment Trends Cool, Crude Traders Look for Guidance from Growth Prospects

North American Commodity Update

Commodities – Energy

As Sentiment Trends Cool, Crude Traders Look for Guidance from Growth Prospects

Crude Oil (LS NYMEX) -  $70.38   //  $0.34   //  0.49%

While the NYMEX-based crude contract would technically eke out a modest advance for the opening day of the week, the market has essentially passed the day unmoved. In fact, this benchmark energy product has been confined to congestion for the past week; the only difference between today and last week is that the level of volatility is dissipating. On the other hand, the investing masses are seemingly skeptical of this recent slump in activity as can be seen in the CBOE’s Crude Oil volatility index. Having retested an eight-month high of 47.0 percent, traders are still paying high premiums on options to protect against another dramatic change in the commodity’s price. Until this volatility is realized however, the masses will keep a constant vigilance on the speculative interests that underlie the capital markets. Feeding the risk appetite / aversion theme that has leveraged so much activity from the capital markets over the past month, the European Union’s questionable future was delivered a small jolt this morning when the Bank of Spain seized savings bank CajaSur as the firm moved closer to failure. While this would suggest a financial vulnerability for one of the EU’s larger member economies; the immediate threat would ultimately seem minimal as the local market benchmarks would weather the news with a relatively muted response.

Contrasting with the norm as of late, growth considerations would hold greater sway over crude Monday than the ever-volatile speculative cajoling that the threat of a financial crisis can encourage. Feeding demand forecasts early in the Asian session, investors were looking to the world’s second largest energy consumer (China) and its hesitancy in implementing growth and market cooling policy in the wake of the European Union’s troubles. For Japan, the outlook for economic activity was less optimistic according to the Cabinet Office’s economic outlook. The government maintained its assessment that the economy was “picking up steadily” from the previous month; but Finance Minister Kan would also remark that he would hold off on boosting his forecasts until after seeing the revisions for the first quarter GDP numbers to better assess whether stimulus and exports are putting in an unsustainable plug for the recovery. Rounding out consumption probabilities for the top three energy importers, crude traders would further enjoy an upgraded outlook for the United States. While the existing home sales data was questionable given the inventory glut; the Chicago Fed’s National Activity Index would point North with the best reading for the economy since December 2006. Furthermore, the National Association of Business Economics would release a survey that upgraded its forecast for growth this year to 3.2 percent from a 3.1 percent outlook just this past February. Is this round of news enough to substantially tip the scales of supply and demand going forward? Not likely.

Commodities – Metals

In the Absence of Speculative Volatility, Gold Falls Back on Structural and Sovereign Concerns

Spot Gold -  $1,94.95  //  $17.85  //  1.52%

The tempering of Gold’s two-month run to record highs seems to have found a point of equilibrium today. Having slipped over six-and-a-half percent from its record high through Friday, the precious metal put in for its first advance in four days. While this advance wasn’t particularly remarkable compared to recent volatility; it was notable given the relative lack of activity in other capital markets. Before the end-of-the-day sell off in the US session, equities were quiet and relatively unchanged. The same general conditions were notable in the broader commodity market and fixed income. However, gold would establish a clear bias and consistent tend. This was no doubt encouraged by lasting fundamental concerns over the structural and lasting troubles the global financial market face. Speculators may swing from risk adverse to insistent through minute changes in data; but the concern over sovereign fiscal health is a matter that shifts very little (sans major market changes like introduction of the EU’s rescue program) and will therefore maintain support for a larger trend. Speaking of the European situation, the Bank of Spain’s decision to take over CajaSur reminds the investment community and policy makers that the mere promise of assistance is not enough to return the region to health. In fact, savings banks in Spain have fallen on such hard times that the government has established a fund for the group that could total as much as 99 billion euros – the majority of which has not yet been funded.

Spot Silver  -  $17.95   //  $0.29  //  1.64%

Despite the late-session drop in equities and the strong performance from the US dollar through the New York session, silver would nevertheless advance for a second consecutive day. Normally, the precious metal – lacking the independent value of gold – will follow short-term speculative trends and maintain a positive correlation to equities and negative association to the US dollar (one of the preferred safe havens). However, Monday’s appreciation is not particularly incredible. On the whole, the capital markets were relatively stable through the most liquid part of the day; and this stability allowed the commodity to retrace some of the steep losses suffered through the second half of last week.

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

Fears that a Financial Troubles Will Turn into Growth Problems Push Crude Briefly Below $70

North American Commodity Update

Crude Oil (LS NYMEX) -  $69.89   //  -$1.72   //  -2.40%

When boiling the energy market down to the speculative tides of crowd behavior, explaining trends and volatility becomes far easier. However, rationalizing the current trend and pace of an asset isn’t the objective of the trader. Instead, a market participant’s intention is to ascertain where the market is most likely going to go in the future; and the path that it will take along the way. To project the current requires a mix of fundamental and speculative analysis. For crude, the outlook for economic activity has long run below the premium that current price would suggest; but it would take a catalyst to break the steady cycle of capital appreciation. However, since Greece’s troubles turned into a European Union crisis (which may further be developing global implications), the benchmark NYMEX crude futures contract has fallen nine of the past 10 active trading sessions and shed as much as 20 percent of its price from the 18-month highs set earlier this year. Over the months, there have been efforts to truly break the advancing trend that has colored this market since the March 2009 reversal; but all those previous attempts have fallen short. Why then is the current bear trend succeeding where previous slumps have failed? This time around, there is conviction in unwinding risky positions across all the major asset classes. The pressing concern now is that the EU situation is deteriorating to an inevitable flash point that could tip the world’s financial and credit markets back into turmoil. Yet, assessing the situation today, crude maintained its unfavorable trajectory while equities would recover from steep morning losses. From this divergence, we can better see the influence of fundamentals.

For equities, the promise of positive earnings has already triggered investors’ endorphins – leading some to believe that stocks will be able to outperform even in the absence of robust growth. Manufacturing and inventory building (and to a lesser extent business investment) are responsible for the positive quarterly income numbers for the first quarter. Absent was true consumer demand. Filling in for a dearth of spending from the economy’s largest sector is a temporary condition. But for commodities, the reality sinks in a little more quickly. Without the prospect of demand, production plans are scaled back and energy needs in turn pared. We have already seen these detrimental effects in the supply/demand balance for crude. The inventory figures measured by the US Department of Energy have increased 14 out of the past 15 weeks. This highlights another peculiarity though. The benchmark US crude futures contract is based on West Texas Instrument (WTI) which is stored in Cushing, Oklahoma. Recently, there has been an unusual build in the stockpiles of this particular grade, which has led to an unusual $5.57 premium in the UK’s Brent contract. This is an abnormality that will inevitably be reconciled as demand and supply functions level out (for better or worse).

Commodities – Metals

Spot Gold -  $1,228.50  //  -$4.68  //  -0.38%

Fundamental and trading conditions are always in flux. A good example of this truism in action is gold’s activity Monday. If we were following the same speculative template of the past two weeks, we would expect gold to have climbed to new record highs today as risk appetite extended its retracement through the morning hours of trade. However, where the benchmark S&P 500 stock index and EURUSD exchange rate were both plunging to new lows, the precious metal would spend the early hours little changed – and a reversal would actually take place well before the other assets began to recover. Why the divergence? Is gold no longer considered a viable alternative to currencies and other risky assets? This particular commodity maintains its role as a safe haven; but the simple correlation between asset and market condition starts to warp when record prices come into the picture. If we substituted gold for Treasuries, the concept of value would seem clearer. At a certain point, government debt would be considered expensive as investors start to measure the costs and probability of a correction in the asset classes value – which would invariably lead to losses in capital. The situation is the same for gold. Though it represents a meaningful alternative to equities, Treasuries and the US dollar; the commodity which yields no interest, has limited liquidity and is leveraged by speculators is far more susceptible to reversals. This is one concern that will not be easily overlooked.

Spot Silver  -  $18.94   //  -$0.40  //  -2.08%

No longer drawn in by the gravity of an aggressive move from gold, silver would defer to its normal fundamental backdrop of risky asset and dollar-based speculative instrument. However, despite both the dollar’s pullback and equities’ recovery, the metal would maintain most of its losses through the close of Monday’s session. The biggest decline in nearly two weeks has pulled silver well off its record highs and suggests there is excess premium built into this asset that straddles the two worlds (that of a precious metal versus an appeal of a speculative asset).

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

Record High for Gold as Sovereign Credit Risks Survive EU Rescue Effort

North American Commodity Update

Crude Oil (LS NYMEX) -  $76.06   //  -$0.74   //  -0.96%

Risk appetite wouldn’t hold up for long after the European Union announced a massive 750 billion euro bailout program to curtail the next financial crisis. Split between natural fundamental demand and pure speculative interest, crude oil would gain little ground after the news was integrated into price action Monday. By Tuesday, optimism had faded and speculators were once again monitoring critical levels in their respective markets. For NYMEX-traded oil, the consequence of the $75 per barrel level is obvious. Once again, the market is on the verge of toppling a bullish trend that has been in place since the first quarter of 2009 – the beginning of the recovery from the previous two years’ financial crisis. However, this is not just a precipice for crude. Equities, currencies and all yield-based assets are invariably facing the threat of reversal. Should this plunge occur shortly after the EU’s effort to stem the region’s bleeding, the negative impact on sentiment would be far worse than it would have been otherwise. Such a turn of events would be a clear sign of doubt over the collective governments’ ability to curb another market collapse. Given the powers that be are already overextended with obligations and stimulus measures, a second tumble may have to play out naturally.

Forecasting the threat of a financial seizure is more threatening to crude than merely depleting the speculative premium that is no doubt built into the energy market. The previous crisis was a lesson in how the withdrawal of credit and investment funds has a very real impact on economic activity. The industrialized world is already on shaky ground in its recovery; and a second blow could cause irreparable damage. What’s more, the emerging market economies are far more prone to trouble this time around. Strong growth in powerhouses like China helped buffer the global pain through the previous slump. Today, the nation is trying to deflate a speculative bubble and has just reported inflation has hit an 18-month high. For an unmistakable read on growth and investor sentiment concerns, the market will closely monitor the preliminary readings on first quarter GDP in Europe. Should the Euro Zone (or any of its major counterparts) show an unexpected set back before the Greek situation really started to deteriorate, confidence that the region will be able to ride out the storm going forward will dissolve quickly. In the event that macro data is met with indifference, oil traders will turn to the US Department of Energy’s inventory figures for the week ending May 7th. The analyst consensus is calling for a the 14th increase in crude holdings in 15 weeks, a figure that would fit with the increase in the API figures for the same period.

Commodities – Metals

Spot Gold -  $1,232.88  //  $29.78  //  2.47%

Though gold’s rally on Tuesday was not as technically as aggressive as the surge this past Thursday ($33.30 or 2.83 percent), this more recent advance certainly holds greater clout. Having persisted in a choppy but consistent advance over the past three weeks, the precious metal was able to push to a new record high. There is no doubt a speculative component to this performance. The proximity of such remarkable levels is always a draw for the traders looking to generate momentum through meaningful price developments. However, the fundamentals are just as accommodative to this move. Risk aversion is the primary catalyst for the commodity’s advance. Looking at other gauges for investor sentiment, equities would tip lower through the day and the US dollar would itself edge higher. However, gold’s take on sentiment reaches beyond simple flight-to-safety flows. This particular alternative asset is quickly being adopted as a hedge to currency exposure as well as the risk traditionally associated to speculative securities. Given this unique relationship, we see more clearly that doubt over sovereign credit risk is building despite policy markers’ efforts to curb record budget deficits and looming crises. The European Union’s 750 billion euro bailout plan is just one part (albeit a big one) of the market’s overall apprehension. Officials in the quickly sinking euro-area have already struggled to enact a uniformed rescue; and there are still severe doubts that they will be able to pull together on this most recent reiteration. However, the issue runs deeper than concerns with Greece. In the effort to revive economic activity and prevent a financial collapse in the wake of the 2007-2008 financial crisis; the world’s largest economies took on record levels of debt and toxic assets onto their balance sheets. Naturally, this prone financial position turns the standard safe haven choice (government debt); into a risky asset in its own right.

Spot Silver  -  $19.31   //  $0.79  //  4.24%

There are a few fundamental drivers that can have an overwhelming influence over silver. Given the speculative interest in the metal through the futures markets, risk appetite often translates as most volatile driver. Furthering sentiment’s sway over price action, the inverse relationship to the US dollar (the primary pricing instrument for the commodity) further pushes the metal to one side of the risk spectrum. However, there is a third catalyst that cannot be overlooked: gold. As the second most traded precious metal, silver will often follow its more expensive counterpart when there is a large move to set a precedence. With the surge from the yellow metal, silver would be ushered up to a 25-month, triple top at $19.50. This is an obvious line in the sand for traders.

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

Growth and Risk Appetite Trends Improve on EU Rescue, Crude Enjoys the Support

North American Commodity Update

Crude Oil (LS NYMEX) -  $77.20   //  $2.09   //  2.78%

All it would take was one of the largest collective bailouts in modern financial history; but the fire was finally put out Monday for crude oil. The first advance in five sessions – following the worst weekly decline for the commodity since the exhaustion selloff back in mid December 2008 – the benchmark energy product was climbing on the combined effort of growth and investor sentiment relief. This fundamental and speculative boost would come from the same source, the announcement that the European Union and IMF had drawn up a loan program to prevent the spread of sovereign credit troubles estimated to top 750 billion euros. Naturally, this is a significant step to stabilize the EU itself; but it further helps to balance one of the biggest threats to the normal functioning of the world’s capital and credit markets. As one of the favored physical speculative assets amongst the global investor crowd, oil was a natural benefactor to the news. In fact, measuring the influence of this news: the S&P 500 marked its biggest rally in 13 months; some European equity indexes rallied more than 10 percent; and the US dollar (the main pricing instrument for oil) marked its biggest tumble since March 18th of last year. However, there is still obvious skepticism over the health of the speculative markets. A clear sign of this doubt can be seen in the dollar’s aggressive, bullish reversal into the US session. The costs and availability of funds for this plan are far more invasive than many may be accounting for. Not only are the ‘healthy’ EU members going to have trouble raises the funds when they are already on pace for fiscal consolidation; but those countries drawing on the aid will have to suffer deep recessions and a form of foreign control over domestic finances to gain access. These are realities that don’t easily fit into the quick recovery scenario.

Though the speculative implications of European rescue effort is obvious, energy traders are just as interested in the growth consequences. Not long ago, a number of officials (the ECB’s Weber) and policy bodies (the Chinese central bank) warned that the spread of a crisis in the European area could undermine the still-fragile recovery that the global economy is trying to foster. We have seen what kind of effect a financial crisis can have on actual growth with the Great Recession. The connections for this new threat should be clear. Yet, while this guarantee reduces the probability of an imminent credit seizure, it does not resolve the situation where those EU members with unacceptably high deficits will have to suffer second bout recessions while those doling out the aid will have to take a hit in their own progress towards expansion. Outside of the EU, oil traders would also take note of the trade figures from China. The second largest consumer of energy products in the world increased net imports of the precious commodity to a record 5.13 million barrels per day last month. Considering this economy’s remarkable growth is built largely on stimulus spending, there is reason to be skeptical from both speculative and fundamental angles on the future.

Commodities – Metals

Spot Gold -  $1,203.10  //  -$5.30  //  -0.44%

News that European officials were able to pass the most comprehensive rescue plan since the inception of the regional Union helped cool fears of a spreading crisis and sovereign credit downgrades. Like any safe haven asset, gold would suffer with the improved sentiment, marking its worst intraday decline in five months. However, the precious metal is not your standard alternative-to-risk assets. While it maintains a history as a harbor for funds during periods of uncertainty or inflation; recently, investor interest has centered on the commodity’s value as an alternative currency when so many of the standard monetary units have seen their sovereign credit ratings come under review. When emerging market currencies are considered to prone to volatility while the industrialized benchmarks are at risk of being devalued by ratings agencies, there are few options left to investors looking to protect their capital. Using gold’s unique status in the global array of assets, we can infer from the metal’s sharp intraday reversal that the EU rescue program doesn’t fully offset the likelihood of downgrades for Greece, Portugal and Spain – much less the UK and US later down the line. Looking at investor demand for the precious metal, the SPDR Gold Trust (the world’s largest ETF backed by metals) reported a 2.71-ton increase in net holdings to a record 1,188.5 tons. This makes this collection of investors a larger holder than the Swiss National Bank.

Spot Silver  -  $18.49   //  $0.13  //  0.72%

Though silver has an undeniable correlation to its more expensive counterpart (gold) – and thereby a connection to risk trends – this particular metal is far more reactive to speculative interests and global growth projections. This being the case, it is surprising that silver’s advance Monday was so modest when the S&P 500 enjoyed its biggest daily climb in over a year. Though the third consecutive positive close, the day’s performance was far weaker than Friday’s impressive rally. Does this reflect a unique characteristic of the metal or an interesting angle on risk appetite? Time will tell; but the answer is likely ‘both.’

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

Persistent Financial Crisis Concerns and Another Jump in Inventory Keeps Crude Grounded

North American Commodity Update

Crude Oil (LS NYMEX) -  $82.50   //  $0.06   //  0.7%

Through the early morning (Asian and European sessions) of trading Wednesday, risk appetite was recovering from yesterday’s big hit. The capital markets and all assets with a connection to economic activity were racked Tuesday after rating agency Standard & Poor’s downgraded Greece’s sovereign credit rating to ‘junk’ status and stoked fears that troubles were spreading by further lowering Portugal’s own rating. Conditions in the European area are deteriorating; and officials’ sluggish response to providing only worsens the situation as the potential costs seem to outgrow the promises for aid. However, there is a sense of normalcy in this situation that has helped to prevent panic from spreading. While the problems in the European Union have certainly worsened, market participants have nonetheless grown used to the pain from Greece and officials’ efforts to put out the fire. This is a dangerous act of discounting a problem that could balloon into a global crisis; and crude as a speculative asset is not immune to this potential hazard. And, reminding traders that this situation is certainly progressing, the S&P announced in the early morning hours of the US session that Spain’s rating was downgraded. This had a prominent impact on the assets in Spain, Greece, Portugal, Ireland and all those EU members that are considered at risk; but the more traditional speculative assets (like crude) would either hold steady or recover lost ground. For the active NYMEX crude futures contract, congestion developed around the floor of a very prominent technical formation. With the US dollar (the pricing standard for the energy product) working to new yearly highs, there was an additional hurdle for a reversal.

Looking beyond the confusing sentiment scenario for the day, fundamentals would also provide a relatively mixed picture of supply-and-demand for the crude. At the top of energy traders’ calendar was the US Department of Energy’s inventory figures for the week ending April 23rd. Following the unexpected 5.34 million barrel surge in stockpiles reported by the American Petroleum Institute yesterday; the DoE’s bigger than expected 1.96 million barrel jump seemed relatively tame. Nonetheless, this was the 12th increase in 13 weeks and it would bring net holdings to a June high of 357.8 million barrels. Supply, at these levels, does not look like it will contribute to a push to $90 any time soon – even if refineries are operating at 89 percent capacity (its highest level since July 2008). What’s more, for the NYMEX’s benchmark West Texas Intermediate grade, the additional 1.3 percent increase in stockpiles in Cushing, Oklahoma (where it is generally stored) will further keep the American market’s depressed – leading to the now $3.00 premium for UK-based Brent over is US counterpart. On the other side of the equation, the spread of financial uncertainty threatens a still-nascent economic recovery. With the advanced reading of the United States’ first quarter GDP reading expected to cool from a 5.6 percent to 3.3 percent annualized pace on Friday and China actively working to cool its booming growth, there is a clear threat to the potential for expansion that can limit speculation’s influence.

Commodities – Metals

Spot Gold -  $1,172.65  //  $4.80  //  0.41%

The active gold futures contract on the COMEX was putting in for its fourth consecutive daily advance Wednesday – the most consistent advance from this particular asset since the period through December 3rd. The commodity’s strength was notable constrained by the correction in risk-based instruments following yesterday’s aggressive selloff; but the favored safe-haven would nonetheless keep its head above water. This buoyancy can be attributed to the metal’s role as a hedge not to specific region’s but rather government debt and currencies as a whole. Switching between Greek and German debt is a necessary evil when seeking safety and return; but even in an effort to isolate risk during another tremor in the Euro-area markets, there is still a clear impact on bund’s volatility. Looking to avoid inevitable troubles with government debt loads and currency volatility in the future, the precious metal is one of the few alternative stores of wealth that has a history of providing a haven. Today, another quake with an epicenter in the European region was felt when Standard & Poor’s kept the pressure on with a downgrade to Spain. While this particular member’s rating may be far from that of Greece’s, it is far larger and its weakness can have a far greater impact on the region. Going forward, the EU and IMF are likely to pass its 45 billion euro rescue package (perhaps even with an increase); and gold will likely lose some ground. However, it will only be a temporary reprieve for a much larger issues.

Spot Silver  -  $18.11   //  -$0.07  //  -0.36%

With the back in forth in underlying risk appetite trends and the US dollar, silver would find itself jostled by its fundamental moors. Through the early morning session, when risk appetite was trying to find its footing and the dollar was pulling back, the metal was holding stationary. However, by the time the dollar found its footing again and the risk-sensitive assets pulled back once again, silver would tumble. The Spain news would draw a sympathy bounce from Gold; but ultimately, this cheaper metal would end the day with its third bearish day.

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

The Blossoming of Another Possible Financial Crisis Unnerves Crude Oil Speculators

North American Commodity Update

Crude Oil (LS NYMEX) -  $82.15   //  -$2.05   //  -2.43%

There should be no doubt that the oil markets are not simply populated by those looking to hedge their exposure to physical supply and demand. This market – like most others – is heavily influenced by speculative interests. Today, those speculative ties would lead the benchmark NYMEX crude oil contract to its biggest drop since April 16th. And, for an objective view for those pointing to the unique influence that the Cushing Oklahoma inventory build may have, the active Brent futures contract would suffer its biggest slide in six active sessions (though there was a notable difference in the severity of losses between the two that does speak to the building premium between the two). Looking for the catalyst for Tuesday’s rebound in volatility, it was hard to miss the influence the Standard & Poor’s downgrades to both Greece and Portugal had on the international markets. For the Euro-area, the ‘junk’ status for the former is another step in the nation’s ever-deteriorating financial position. At this stage in the game, it is highly unlikely that even if the EU/IMF finally do agree on the conditions of the 45 billion euro rescue package that such a figure would stem the bleeding. However, it may be Portugal’s two-step downgrade that is most disconcerting. While Greece is the more troubled European Union member, Portugal’s descent suggests credit troubles and investor fear is spreading across the continent. It will be difficult enough for policy makers to craft a rescue for one economy, bailing out two or more would be nearly impossible.

However, mere panic selling isn’t the extent of the oil market’s exposure to this financial disruption. The true fundamental impact from this event could lead to a medium-term slump in demand. The global economy’s economic recovery is still young. Another period of distress in a system that is already fragile and highly leveraged with government assistance could stress nations and markets far more than they were in the original decline. Following the line reasoning to crude demand, the spread of financial troubles across Europe could easily sap liquidity and credit availability across the globe. In turn, investment would dry up and consumer loans disappear with a very real impact on economic activity. Long-term concerns like these that temper growth forecasts have been around for some time; but it takes an immediate jolt to bring such concerns to the forefront. In the meantime, other economic news was relatively supportive of growth and demand. A consumer confidence survey for the US reported the highest level of optimism since September of 2008. Whether this actually translates into pull through demand for raw crude (which is refined into gasoline and heating oil as well as in the production of other goods) remains to be seen. Perhaps the supply side of the balance can readjust the equilibrium. Tomorrow, the US Department of Energy will release its inventory report for the week ending April 23rd. Far from a bullish bearing heading into the release, stockpiles of oil are expected to have grown another 1.05 million barrels for the 12th increase in 13 weeks.

Commodities – Metals

Spot Gold -  $1,167.30  //  $13.80  //  1.20%

Whether gold is playing the role of a safe or speculative asset at any one time depends on both the primary fundamental concern behind the market and the intensity this particular driver may retain. News today that both Greece and Portugal were downgraded by Standard & Poor’s has triggered a demand for safety and encouraged investors to diversify away from high-risk speculative positions. So, while the precious metal maintains its appeal as a speculative commodity that trades not far from a record high; it is the asset’s value as an alternative to government debt and currencies that truly drives the market. Acting as a catalyst for the spread of uncertainty, Greece’s national credit rating was cut to junk status – preventing the nation from using its debt as collateral for vital ECB loans and leveraging investors’ demand for return for giving the nation capital. This pushes an already troubled economy deeper into a hole. However, it is Portugal’s own downgrade that is the real concern. A deterioration in the credit of one economy already on the way down is to be expected; but a reduction from another EU member points to broader troubles that could infect a region or the entire world. That being the case, investors will try to limit sovereign debt risk in masse and will look for an alternative to both government debt and currencies in general. This explains gold’s advance to record highs in terms of euros, pounds and even the Australian dollar. Yet, the dollar, and the treasuries that support it, is a more recognized safe haven for capital. Therefore, the two week high in gold priced in dollar’s points to particular strength beyond mere speculative interests. That being said, the SPDR Gold Trust (the largest ETF backed by gold) reported a net 6.1 ton increase in assets to a record 1,146.2 tons yesterday.

Spot Silver  -  $18.20   //  -$0.10  //  -0.53%

What would gold’s day look like if it was not considered a benchmark, ‘risk-free’ alternative to the more traditional government debt crowd? For that answer, we look to silver. A metal that does not have the historical appeal as its more expensive alternative as a store of wealth, silver actually fell on the day and would not even come close to the four-month highs set just two weeks ago. Making this commodity’s progress even more troublesome, the US dollar would enjoy its own advance on safe haven flows and further pull silver down.

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

Oil’s Advance Suffers another Sharp Decline as Supply-and-Demand Concerns Surpass Risk Trends

North American Commodity Update

Commodities – Energy

Oil’s Advance Suffers another Sharp Decline as Supply-and-Demand Concerns Surpass Risk Trends

Crude Oil (LS NYMEX) – $83.82 // -$1.30 // -1.53%

Though price action for the benchmark US currency futures contract was extraordinarily choppy this past week, it would nevertheless put in for four consecutive daily advances through Friday. However, given the fundamental uncertainty surrounding investor sentiment and the underperformance of those assets that have establish a significant correlation to the health of this particular commodity, this impressive run would not hold. Starting the new trading week off with a substantial loss, the active NYMEX crude contact would put in for one of the most aggressive corrections of those assets classes with a distinct connection to economic growth. In contrast, the Dow Jones Industrial Average ended the day nearly unchanged and those currency pairs with large yield differentials were similarly little moved. For the energy market’s standard risk appetite drive, the lack of resolution on Greece’s financial quandary weighed heavily. Disappointment in the lack of tangible progress in this ever-evolving crisis translated into inaction and uncertainty rather than disappointment and selling. Oddly enough, crude would further diverge from the US dollar (its primary pricing instrument) as the benchmark currency worked on its second daily contraction.

For crude traders, market mechanics themselves have exposed general abnormalities. At the surface, the futures market has seen a remarkable decline in volume (on the New York Mercantile Exchange) from the spike two weeks ago. At the same time, open interest is still trending upwards towards its highest level in two years. These two conditions, along with the CBOE’s Crude Oil Volatility Index hovering just off its lowest levels in two years, would suggest a lasting state of stability has established itself. However, such conditions clearly contrast from the level of activity in underlying price action itself and are at odds with the fundamental risks posed to risk appetite as well as natural levels of demand. Another market-based sign that conditions are perhaps less passive than they may seem at first blush is the premium of US-based West Texas Intermediate over its equivalent UK Brent contract. The $2.63 excess on the former can be partly explained by the excess inventories building up at the Cushing, Oklahoma hub. Furthermore, the contango (when a futures contract with a later maturity date than the active contract) between the June and July contracts on the WTI grade is at its widest since December 14th ($2.27).

Such divergences are partially born from the imbalance between speculative interest and fundamental demand. These two essential elements of price discovery can diverge as long as one fundamental ingredient is under intense scrutiny and the other remains stable. In the near future, it may be the traditional supply-and-demand argument that bears greater weight on price action. Through an intense week of economic releases, this Friday brings the advanced reading of US 1Q GDP. As the world’s largest energy consumer, expansion from this powerhouse is essential to draw the fundamental fair value up to the high speculative level that investors have kept the market at.

Commodities – Metals

Gold Little Changed Monday as Risk Trends Cool, Dollar Eases Back

Spot Gold – $1,153.70 // -$3.90 // -0.34%

The combined influences of risk appetite, dollar hedge and alternative investment left gold in a lurch Monday. Both investor sentiment and the US dollar would put in for opposing intraday reversals through the day. For equities, the Asian markets opened with a thunderous rally from Japan’s Nikkei 225 index. The exuberance was toned down when the European markets took over for liquidity; and the US benchmarks would end the day ultimately unchanged. In contrast, the benchmark currency opened the week with a tempered advance that would inevitably turn into a loss for the day. This back and forth is ultimately a reflection of congestion where risk appetite controls the bearing and tempo. The congestion of these more ‘straight-forward’ asset classes further complicates the scene for the precious metal. Not far from the record highs set in December, the commodity is stuck between its role as a speculative instrument and safe haven. Despite deadlines and assurances from key policy makers, the Greece situation is still holding sovereign debt risk hostage. The financial strapped nation asked this past Friday to active the financial rescue plan that the EU and IMF had vowed just a few weeks ago. Yet, despite this promise of assistance, there is still obvious hesitancy in providing support – a fact that has not gone unnoticed by investors. The market is now waiting to see if and when the funds will be released. The longer a resolution takes, the more concerned the market will become. In the event of a panic, gold will strain between its speculative roots and a safe haven status that is helpfully leveraged by concerns surrounding the fungibility of government debt.

Spot Silver – $18.30 // -$0.04 // -0.19%

Given the low level of activity in equity markets by the US session and the ambling pace of the US dollar, silver would put in for a slow session Monday. The day’s range was the smallest since March 15th – though the spot market would nevertheless put in for its highest intraday swing in six sessions. Fundamentals are more closely tied to risk appetite than the dollar’s meandering pace; but underlying market conditions suggest speculative interest is growing. Volume on the active contract has steadily grown over the past month and open interest is just off its highest level in three months. This divergence between price action and turnover suggests volatility could pick up soon.

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

An Intraday Rebound in Risk Appetite Salvages a Potential Breakdown for Crude

North American Commodity Update

Crude Oil (LS NYMEX) -  $83.78 //  $0.10 //  0.12%

There was no denying; risk appetite was in full control of crude oil price action Thursday. A growth-linked asset with significant speculative interest, this commodity becomes ever more sensitive to risk appetite as the market nears historical extremes (bullish or bearish). With the benchmark NYMEX futures contract within stone’s throw of the 18-month high set just weeks ago, it is not a stretch to assume that ‘trader’ capital will define the next move for the market. However, a partiality to changes in speculators’ optimism offered an unusual path for the day. With financial strains coming in the form of forecasts for tempered growth trends and burgeoning sovereign debt loads, Greece’s trend lean towards default looks like a sure spark for a financial crisis and fundamental meltdown. Therefore, news this morning that the country’s debt load is actually larger than initially reported and that Moody’s had downgraded the nation’s credit rating is a big step towards disaster. Initially, this event would weigh risk appetite lower through implications that a default could lead to a global crisis. However, just hours after the news, the benchmarks for the various asset classes recovered. This is highly unusual as the probability that this situation will come to an agreeable outcome is slim-to-none. Perhaps this is a sign that investors are too confident in their own gains to this point or otherwise the governments of the world will bail them out if conditions go south. Neither term is an appealing bet.

A financial crisis can have a tangible impact on the energy market through the evaporation of credit and a general avoidance of risky positioning. However, the more lasting pain will likely come through supply-and-demand factors. It is a common argument amongst economists, analysts and traders that without the influence of risk appetite, oil prices would be well out of line. Looking at the naturally levels of production and consumption of the precious resource, investors have been temporarily comforted by the economic recovery. Indeed, the IMF yesterday upgraded its forecast for global growth; but there was a notable tempering of that pace when the outlook was extended out to 2011. The impressive pace of growth to this point can largely be chocked up to a natural rebound from the Great Recession (a recovery that was largely based on government assistance). Therefore, with the UK GDP figures due tomorrow and the US numbers due next week, there may be an initial sense of optimism on the report. However, sentiment will eventually give way to reality as consumption fails to keep pace.

Commodities – Metals

Spot Gold -  $1,141.90  //  -$4.85  //  -0.42%

Despite the serious fundamental waves this morning, risk appetite would remarkably weather disturbing news and ultimately leave the market’s benchmarks largely unscathed. Investors’ seemed to disregard news that Greece’s deficit-to-GDP ratio was 13.6 percent compared to the previously reported 12.7 percent as well as the follow up that Moody’s had cut the nation’s sovereign credit rating. Both of these changes move the nation closer to default. For gold traders such an outcome would severely unbalance risk appetite and spark a flight to safety for speculative capital. While this would normally send funds to dollar-based assets and government debt, the lack of flexibility for governments to react to another crisis and the record debt load they currently float will likely direct investors to another historical safe haven: gold. With the initial slip in risk appetite this morning, the precious metal would edge higher; but the subsequent recovery would later temper its advance. At the same time, the dollar’s steady strength through the session would add an additional reason to sell gold. It is now between dollar and gold for sentiment’s affections.

Spot Silver  -  $17.99   //  -$0.11  //  -0.61%

Silver would naturally follow the dollar and risk appetite through today’s session. Sentiment’s waver would provide limited volatility while simultaneously anchoring the metal. However, for ultimate trend, it was the US dollar that would decide the commodities fate. The first decline in four sessions, silver has not necessarily broken its bullish trend; but it has certainly cooled the opportunity to fully recover from last Friday’s losses through the end this 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

Growth-Based Upswing in Crude Stalled by Surge in Oil Inventories

North American Commodity Update

Commodities – Energy

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