Fundamentals

Volume Recovers along with Bearish Convictions for a Steep Crude Loss Tuesday

North American Commodity Update

Commodities – Energy

Volume Recovers along with Bearish Convictions for a Steep Crude Loss Tuesday

Crude Oil (LS NYMEX) -  $79.08  //  -$1.23 //  -1.53%

Following Monday’s relatively restrained level of activity, crude would find conditions far more interesting today. For the market itself, the commodity would report its biggest daily decline since the February 5th tumble. This price action was further encouraged by a surge volume behind the active NYMEX futures contract (seven times greater than the recent record, non-holiday lull seen yesterday). However, despite the session’s bearish drive; bullish interests would step in to maintain the rising trend channel of the past two-and-a-half weeks. Where was the motivation for such a significant reversal? Risk appetite was no doubt the root of investor activity across the asset classes; but macro-economic data would have its own stirring qualities. Taking stock of sentiment, equities and commodities were lower across the board through the active US session. As has been the case recently, the move away from risky positions (or unwinding existing exposure) has rerouted capital away from assets like crude and to the US dollar. As the primary pricing instrument for oil, the currency’s gains offer a further weight to price action.

While the shifting tides of risk appetite can carry itself under its own momentum, a few big-ticket economic releases no doubt added fuel to the fire (and perhaps catalyzed the initial tumble).The dollar’s rally this morning began as EURUSD responded to the release of the German IFO business sentiment survey for February. Confidence in Europe’s largest economy unexpectedly fell for the first time in 11 months on a combination of harsh weather, uncertainty surrounding consumer spending and the threat that Greece troubles could turn into a Euro Zone financing matter. The sharp drop in the US Consumer Confidence report from the Conference Board amplified the dour mood among investor interests. The present conditions reading of the report marked its lowest reading in 27 years; and with it, expectations of pull-through energy demand has been depressed even further. Turning form macro interests to energy-specific fundamental considerations, inventory data will be released over the next 24 hours. After the close of the US session, the American Petroleum Institute (API) is scheduled to publish its stockpile figures for the week ending February 19th. This data is remarkable in its own right; but for market-influence, the US Department of Energy (DoE) due tomorrow holds the greater influence over price action. Bloomberg’s consensus forecast is looking for a 1.9 million barrel increase (which would account for the longest period of gains in nearly nine months) while gasoline holdings are seen rising by 600,000 barrels (though, as of last week inventories were already at their highest level since March of 2008).

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

Commodities – Metals

Gold Extends its Pullback, Breaks a Steady Trend Channel as the Dollar Rallies

Spot Gold  -  $1,103.70  //  -$10.55 //  -0.95%

Speculators would initially attempt to hold up gold’s two weeks rising trend channel; but a souring of background sentiment would eventually call the end of this notable technical pattern. Tuesday’s decline measured as much as 1.3 percent through its session low; and the loss through the NYMEX close was the biggest bear run the commodity has seen since the February 4th plunge. For drive, the tumble in equities and subsequent advance for the benchmark dollar would bear down on two of the precious metal’s primary fundamental applications: speculative asset and dollar hedge. It may seem that these two drivers are the same thing. However, a comparison of a speculative benchmark like the Dow Jones Industrial and the benchmark currency itself shows a strikingly different path. Over the past few weeks, the Dow has advanced slowly but steadily; while the dollar has held onto its trend through this same period and even established fresh 8-month highs. With interest rate speculation bolstering real market rates, the dollar is a concern all of its own. Looking ahead to tomorrow, the commodity’s other two primary roles (inflation hedge and safe haven) will be roused by testimony from two key US policy makers. Treasury Secretary Timothy Geithner will speak on government spending going into 2011 – developing sovereign credit concerns and potentially reviving the metal’s tarnished appeal as a store for funds despite its high price. Fed Chairman Ben Bernanke will also testify before a house panel on monetary policy. This will be particularly interesting for rate watchers given the central bank announced a surprise hike to the discount rate last week.

Spot Silver  -  $15.84 //  -$0.41  //  -2.50%

Just like its more expensive counterpart, silver would suffer its biggest daily decline in nearly three weeks on a marked advance for the dollar and overall slump in speculative fervor. However, unlike gold, this metal would not force is own rising trend channel. Looking at market activity, aggregate open interest among the active futures contracts is near its lowest levels since September 8th as investors lighten their portfolios of speculative positions that don’t bear tangible interest. Tomorrow, the March 2010 futures contract will expire; requiring those that trading this contract to roll over to the next month.

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

Iran Sanctions Move to the Forefront for Crude Traders as Sentiment Trends Cool

North American Commodity Update

Commodities – Energy

Iran Sanctions Move to the Forefront for Crude Traders as Sentiment Trends Cool

Crude Oil (LS NYMEX) -  $80.00  //  -$0.06 //  -0.07%

Looking across the various markets Monday, it was clear that speculative interests were relatively subdued. This alludes to the presence of big-ticket fundamental concerns (the potential Greece default and steady withdrawal of government stimulus) that are both preventing another build up in speculative positions and found investors seeking out further developments in these matters that could define the future trading environment. For crude, the lack of underlying risk appetite would dry up momentum behind the commodity’s impressive advance of the past two weeks. On the day, oil prices were relatively unchanged; but there was notable discrepancy between the intraday price action of the March and April futures contracts on the NYMEX as the market rolled over for the former’s expiration. Taking a broader view of speculative interest, the CFTC’s Commitment of Traders numbers revealed net speculative long positions for the benchmark crude contract jumped 63 percent in the week through the 16th; though the total only represented 5.3 percent of total open interest.

From speculative interests to supply-and-demand considerations; the docket for scheduled and unscheduled event risk was relatively light. For macro economic data, the US Chicago Federal Reserve National Activity Index reported only the second ‘above trend’ growth reading in nearly three years. The outlook for the world’s largest economy is brightening; but the struggles for employment and business investment are notable hurdles to a true recovery in activity and thereby energy demand. What’s more, with emerging markets seeing export demand drying up and some nations (China) forcibly slowing the economies; the forecast for global crude consumption is discouraging. This very assessment was formed by the Centre for Global Energy Studies – headed by a former Saudi Arabian oil minister – when they projected that oil prices will struggle to hold above $80 this year. Among the other headlines that oil traders are keeping track of are the French strikes and political spat between Iran and the rest of the world. A refinery strike at Total in France is entering its sixth day. A large union is calling for additional strikes at other major firms. In the Middle East, Iran is coming under pressure from the US for its plans to build two new uranium enrichment plants. Both of these issues are still developing; but their scale for influence on true supply and demand is relatively constrained. Looking ahead to the forthcoming inventory reports, Bloomberg’s survey has tallied a forecast for a 1.95 million barrel increase in stockpiles. If this increase is released, it would be the longest period of gains in nearly nine months.

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

Commodities – Metals

Little Movement in the Dollar and Risk Appetite Leads to the Same for Gold

Spot Gold  -  $1,114.00  //  -$5.20 //  -0.46%

With neither risk trends nor the US dollar developing significant headway Monday, gold would find no fundamental leverage to resolve the technical congestion that has developed over the past week. Spot gold has carved a steady bullish channel since the February 5th reversal; but restrained momentum has prevent the market from moving beyond $1,225. Like currency or equity traders, those in the gold market are looking for the larger fundamental trends to develop headway. The European Union’s management of Greece’s financial troubles has been woefully disappointing; yet cautious investors are hesitant to label this the next financial crisis. The same is true about the steady and widespread withdrawal of government stimulus – a vital element to the global financial market recovery last year. While neither threat has produced any positive or negative developments; the market’s mere appreciation of these dangers reflects a state of uncertainty. In other news, the World Gold Council opined that China wasn’t a “realistic candidate” to buy the remaining portion of the IMF’s gold inventory that it plans to sell (approximately 191 tons). This contradicts the assessment of other notable analysts who say China’s efforts to diversify away from the US dollar will lead to large purchases. Currently, the world’s second largest economy is struggling to prevent the popping of a significant asset bubble. A move into risk-sensitive gold seems an unattractive move at the metal’s already high prices; but a concentrated exposure to US policy and markets is a problem in its own right.

Spot Silver  -  $16.23 //  -$0.09 //  -0.55%

Silver would advance intraday to its highest level in nearly three weeks Monday morning; but the metal would struggle to hold onto its gains as the US dollar and Dow maintained tight ranges for the day. Looking at market tangibles, volume on the active contract extended its steady decline over the past week – a trend that roughly extends back to the beginning of the current bull trend. Furthermore, open interest has tumbled to its lowest level since November 12th – though it is difficult to establish how much of this is due to the proximity of the February futures’ expiration (then again March is the far-more active contract).

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

Oil, Gold Vulnerable as Technical Positioning, Risk Trends Favor Downside

Commodities – Energy

Oil Vulnerable as Technical Positioning, Risk Trends Favor Downside

Crude Oil (WTI)       $79.74       -$0.07       -0.09%
Prices have met significant resistance at $80.67, a former support level that is being reinforced by the top of a rising channel that has guided the upward correction that has materialized this month. Negative RSI divergence argues for a move lower from here, with initial support seen at $77.53. Shares are lower in Europe while US equity index futures have given back all of their Asia-session gains and now trade in negative territory, bolstering the case for a downside scenario considering the 20-day percent change correlation between crude and the MSCI World Stock Index stands at a formidable reading of 0.89. The economic calendar may help dilute selling pressure, however, as the Dallas Fed’s measure of manufacturing activity is expected to rise 10% in February, marking the biggest increase in three years and boosting oil demand expectations.

Commodities – Metals

Gold, Silver Technical Positioning Points to Bearish Reversal

Gold       $1122.41       +$3.21       +0.29%
Gold continues to trade sideways below resistance at $1125.13, with negative RSI divergence hinting that a move lower is in the cards from here. Initial support lines up at $1101.16, the recent range bottom. As with oil, the 20-day percent change correlation with the MSCI World Stock Index remains formidable (now at 0.78), meaning the signs of weakness emerging across European shares and US index futures bolster the likelihood of the downside scenario.

Silver       $16.41       +$0.09        +0.59%
Silver’s technical positioning closely mirrors that of oil, with negative RSI divergence hinting at fading bullish momentum below resistance at the intersection of a horizontal support-turned-resistance level and the top of a rising channel set from the swing bottom set earlier this month ($16.50). The 20-day percent change correlation between the cheaper precious metal and the MSCI World Stock Index is now at 0.78, so as with gold, the risk sentiment landscape is supportive of emerging selling pressure. Initial support is seen at the $16.00 figure.

Crude Follows Other Capital Markets by Shaking off Fed’s Surprise Stimulus Withdrawal

North American Commodity Update

Commodities – Energy

Crude Follows Other Capital Markets by Shaking off Fed’s Surprise Stimulus Withdrawal

Crude Oil (LS NYMEX) -  $79.79  //  $0.73 //  0.92%

The late session drop from crude yesterday in response to a surprise tightening of the Fed’s monetary policy proved temporary (just as it was for the US dollar). Broad-based risk appetite recovered its footing and developed reasonable momentum, lifting the trader-friendly commodity to a five-week high while simultaneously keeping within the general channel that has defined price action since the February 5th reversal. This price action was certainly having its influence on positioning. According to the CFTC’s Commitment of Traders (COT) report, net speculative long positioning in light sweet crude on the NYMEX jumped 63 percent to 68,436 contracts through the week ending February 16th. Notably, this represents only 5.3 percent of net open interest. The contrast of the weekly advance and the generally depressed interest behind the commodity mimic the sentiment that underlies price action. Most capital markets have climbed slowly this past week; but the threats to stability are numerous and certainly growing in scope. Looking forward, the two most immediate threats to speculative positioning are the potential that a European Union crisis will spread from Greece and concern that the withdrawal of stimulus and accommodative monetary policy will expose an otherwise week market.

As for the fundamental balance between supply-and-demand, today’s macro data added little to a strong growth forecast. Indeed, this was the overall theme for the entire week. Today, a 1.2 percent drop in January UK retail sales was offset by an increase in the Euro Zone’s manufacturing activity survey for February. Neither of these indicators would have an overwhelming impact on the broader levels of global consumption. Recently, the API reported US fuel consumption through the month of January fell to its lowest level for that particular month in 12 years. Considering global policy officials have lowered trimmed their growth projections and have stepped up their efforts to withdrawal the same stimulus that fueled reinvestment through 2009, it will be difficult for demand to catch up to current levels of output (even in their notably depressed state). Next week, there is plenty of scheduled event risk to tip the scales of supply and demand; but the revisions for US, German and UK GDP will hold the most tout through the component figures adjustments. Another consideration for the week’s open is the expiration of the March oil contract on the NYMEX. Rolling over positions will undoubtedly skew price action.

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

Commodities – Metals

Gold Mirrors the Dollar’s Reversal Leaving the Metal to a Distinct Range

Spot Gold  -  $1,119.99  //  $11.29 //  1.02%

Both gold and the US dollar would resuscitate their distinct correlations to risk appetite trends (on opposite sides of the scale). The revived relationship between markets would help to amplify the dramatic swing in underlying sentiment trends. Following the close of the active US session Thursday, the Federal Reserve’s surprise hike to the discount lending rate sparked a sense of fear that mirrored the reaction to China’s repeated increase to its own reserve ratio. This step by the world’s largest central bank is aimed at normalizing monetary policy; but it has the very significant side effect of removing the same stimulus that nursed risk appetite back to health through 2009. This effort is building steam globally and will keep pressure on speculative interests for some time to come. However, taking stock of the general sentiment for the week, traders deemed the immediate reaction to the Fed’s hike as overblown. The safe-haven dollar would pullback from eight-month highs; and gold would find encouragement from both the currency and risk appetite. On the other hand, there are a few interesting notes to be made. First of all, the precious metal has not held consistently at a $1,125 range high. In contrast, gold priced in euros would hit a record high (reflecting the fiscal and economic troubles in the Euro Zone). Another notable development was the divergence in Friday’s price action and inflation pressures. The US CPI figures cooled unexpectedly in January – reducing the metal’s value as an inflation hedge. According to the COT figures, net long speculative positioning grew by 7,399 contracts to 188,858 in the week through Tuesday.

Spot Silver  -  $16.32 //  $0.47 //  2.94%

Another solid rally would extend silver to its highest level in two weeks; and yet the metal would not leave the comfort zone defined by the rising trend channel from the February 5th reversal. The boost in volatility and steady bullish bearing would be found through the concurrent influences of a jump in risk appetite and drop in the US dollar. Avoiding the burden of most swells in economic data and concerns over inflation, this commodity is playing its role as a speculative asset well. Looking ahead to next week, the dollar’s divergence to risk trends will likely close as the latter picks up momentum. This will likely unify and intensify silver’s momentum. Looking at speculators interest, the COT figures reveled a modest 1.7 percent increase in net long positioning to 25,378 contracts.

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

Crude’s Climb Tempered by Inventories, Stalled by Fed Hike

North American Commodity Update

Commodities – Energy

Crude’s Climb Tempered by Inventories, Stalled by Fed Hike

Crude Oil (LS NYMEX) -  $78.46  //  $1.13 //  1.46%

Underlying investor sentiment trends passed another day with a mute, bullish bias that would encourage benchmark crude futures prices to a fresh one-month high. Showing just how connected the commodity is to risk appetite; the commodity was little changed through the early morning sessions and lacking direction heading into the open of the US session. It wasn’t until the active hours of the early US session when the Dow Jones Industrial Average advanced at a little more heady pace that crude started show signs of life with a more than two-dollar rally over the span of half an hour. On the other hand, there is the influence of the dollar to take into account. The world’s reserve currency is also the primary pricing instrument for the commodity; and typically, where the greenback heads, crude moves in the opposite direction. However, recently, with risk trends stalling and the dollar moving on its own fundamental merits rather than its safe haven status; we have seen a modest break in correlations. This break is especially perceptible with the dollar’s after-hours rally following a surprise hike by the Fed in the discount rate to 0.75 percent. Such a move is a clear hawkish step from the central bank; it is also have its economic and broader risk implications. In acting to limit banks access to government funds, the Fed is essentially removing stimulus that has been essential to developing the recovery for the US and the entire globe. It will be very interesting to see how US equities open tomorrow in response to this data. Oil traders will certainly be paying attention.

In the meantime, the long-term supply-and-demand glut that the energy market is running received another timely update. Tuesday’s API numbers offered poor forecast for the more market-moving Department of Energy figures due during the regular trading hours Wednesday morning. The industry data reported a 63,000-barrel drop in crude holdings and 1.43 million barrel increase in gasoline stockpiles through February 12th. In contrast, the government numbers showed a significantly higher 3.085 million barrel jump in crude inventories and relatively in-line 1.62 million barrel increase for gasoline numbers. Taking a step back, these numbers may diverge from week-to-week; but over time, they are highly correlated. The same big-picture view of correlation can be taken for the data’s market-moving quotient. While this data may offer a significant change; it doesn’t necessarily add much to the existing notion that supplies are running well beyond the capacities of demand. Hence the preoccupation with risk trends.

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

Commodities – Metals

Gold Holds $1,125 and a Late-Session Dollar Rally Forces Pulls the Commodity Back

Spot Gold  -  $1,117.55  //  $10.74 //  0.97%

For most of the day Wednesday, gold was following along the steady rising trend channel that has developed since the commodity made a tentative reversal two weeks ago. And, while this same channel was still holding strong heading into the Asian session; the volatility behind the market was certainly picking up as traders had to decide whether their primary concern was with the dollar or underlying sentiment trends. Where risk appetite was relatively solid into the close of the US market; the dollar itself was finding a steady bid and received a particularly strong push after the Fed announced its hike of the discount rate. This pits two of the commodity’s primary roles in the financial markets against each other (normally they are linked thanks to the dollar’s status as a funding currency and safe haven). It is still difficult to gauge which will come out on top in the end. In between active market sessions, there is no immediate reaction from the larger investment community to the US central bank’s efforts to drain stimulus. On the other hand, the dollar would have a clear response as this certainly moves up the viability of more aggressive tightening (read: a hike in the foreseeable future not to mention asset purchases). It is likely that these correlations will sync back up Friday. In the meantime, the IMF announced yesterday that it would “shortly” turn to open mark sales of its gold reserves. This past September, the group announced it would sell approximately 13 percent of its holdings; and this effort to expand the sales likely reflects limited central bank demand (it is probably pricey even for these prominent buyers given their balance sheets). The group has 191.3 tons left for sale following the 212 tons worth of sales made since its initial announcement.

Spot Silver  -  $16.03 //  $0.16 //  1.02%

With a purer connection to risk trends and the US dollar (without the troubles that inflation hedging and safe haven status that gold has to deal with), silver would show an immediate and significant response to the US dollar’s late day advance. In little more than half an hour, the metal plunged 2.7 percent. However, despite the tumble, the commodity is still within a broader, rising trend channel. How long will this pattern hold up? That all depends on whether the greenback can find meaningful follow through and global sentiment reports a meaningful response to the Fed announcement.

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

A Surge in Risk Appetite Carries Crude to an Aggressive Rally

North American Commodity Update

Commodities – Energy

A Surge in Risk Appetite Carries Crude to an Aggressive Rally

Crude Oil (LS NYMEX) -  $77.07  //  $2.94 //  3.97%

Most risk-sensitive securities were on the advance Tuesday; and the speculative favorite crude futures contract was no exception. In fact, the front-month contract on the NYMEX forged its largest single-day advance in four months in a nearly four percent move. However, trends are not made in a single day. While the day’s advance was substantial, oil still has significant climb ahead of it to retrace the losses of the past month. What’s more, looking at the motivation behind the rally in price action, volume was notably lighter in the sessions advance than with a number of declines in the recent past; and activity has generally cooled over the past week. So, what was this source of this sudden shock? The answer is clear: risk appetite. A sudden jump in investor optimism has revived the correlations between markets and led those securities with a clear link to yield demand higher. While a measured bullish bias has developed over the past week, momentum has been notably absent as perceived fundamental strength has deteriorated with the emergence of staid recovery data and emerging financial troubles around the world. Greece in particular is a top headline concern; but concern may be temporarily lifted thanks after the EU left the market in wait for a solution to a possible default and given the extended holiday weekend for US markets. The market will look for either a meaningful solution to Greece’s pressure on the broader Euro Zone or uncertainty will very likely resuscitate fear.

Turning from the speculative influences on oil to supply-and-demand fundamentals, there has been a notable improvement in the quality of data over the past 48 hours. In particular, the Japanese 4Q GDP numbers released in the very early morning hours of Monday’s Asian session bode well for energy demand. The preliminary reading of growth reported 1.1 percent expansion through the final three months of last year – the largest increase since the first quarter of 2008. In similar fashion, the annualized reading advanced to a 4.6 percent clip. As the third largest energy consumer in the world, this data has significant tout when it comes to balancing the gap between crude output and consumption. However, like most other industrialized nations, the strong headline readings for Japan are backed by data that points to a questionable trend. Domestic spending and onset deflation are difficult weights to overcome going forward. Another notable boost in the US session was the pickup in the Empire Manufacturing report for February.  A four-month high from this indicator is notable; but tomorrow’s industrial productive figures will likely carry more weight.

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

Commodities – Metals

Gold Surges as the Safe-Haven US Dollar Tumbles

Spot Gold  -  $1,119.65  //  $18.55 //  1.68%

With risk appetite on the rise and the US dollar tumbling Tuesday, gold would find traction in its speculative appeal. On the back of the most aggressive rally in three months, the precious metal was easily able to break the momentum in the loose descending trend channel of the past two-and-a-half months. Similar remarkable reversals were made with the US dollar and Dow Jones Industrial Index (each holding a notable correlation to the extremes of sentiment). However, judging the reversal of underlying sentiment on the foundation of technical alone would be faulty. The absence of US and Chinese liquidity Monday would build pressure behind a tentative retracement of a broader bear trend this past week. However concerns with Greece’s deficit – and the European Union’s handling of the situation – develop over the rest of the week, investor sentiment will follow. The threat of a default may abate as general optimism returns; but the probability that Greece will trim its budget to meet the group’s limits anytime in the near future is extraordinarily low. This is a balance between short-term and long-term fundamental concerns. As has been the case since markets have existed, greed can fill in for fundamental shortfalls and fear pick apart silver linings. Gauging speculators’ bias for risk is essential for charting the course for gold. In the meantime, an eye should be kept on upcoming inflation data. This morning, the United Kingdom’s consumer-based price readings jumped to a 3.5 percent clip – though BoE governor King suggested this was a temporary surge. US inflation indicators scheduled over the next three days will act to confirm whether this the trend for the global economy. If price pressures actually accelerate, it could add additional fuel to a bullish trend for this inflation-hedge.

Spot Silver  -  $16.14 //  $0.59 //  3.82%

With a marked jump in risk appetite and the biggest drop from the US dollar in nearly three months, silver was shooting higher Tuesday. Without the burden of such fundamental roles as inflation-hedge or safe-haven (like gold), this metal would show a purified response to the drive in risk appetite. Looking at price action, the commodity saw its biggest single-day rally since November 16th and easily cleared the even $16/ounce level. Maintaining this course will not be nearly as difficult as maintaining momentum. Monitoring the activity of the dollar and Dow will give a meaningful read on the actions of this commodity.

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

Oil Falls for the First Time in Five Days but Closes Friday Well of its Lows

North American Commodity Update

Commodities – Energy

Oil Falls for the First Time in Five Days but Closes Friday Well of its Lows

Crude Oil (LS NYMEX) -  $74.09  //  -$1.19 //  -1.58%

Oil’s steady, rising trend channel of the past week was brought to a close in the morning hours of Friday’s session. From Thursday’s high (set near the end of the day after the Greek bailout news filtered through the market), the active NYMEX futures contract fell as much as 4 percent before bulls stepped in pushed the market well off its lows. This aggressive move wasn’t formed in a vacuum however. The fundamental impetus for this significant drive was multi-faceted (a fact that could keep the market volatility into next week as well). For direction, traders would look at both risk appetite trends and underlying supply-and-demand factors. As for market-wide sentiment, there were still tremors surrounding the Greek bailout; but until the European Union offers details on the plan next week, this looming event will actually help to anchor trend development. However, this episode couldn’t keep the crude (nor any other speculative asset) stable in the face of another move to cool speculation in the market’s favorite place to invest – China. The People’s Bank of China announced it would lift the nation’s reserve requirement another 50 basis points starting February 25th. This is the second time in a month the policy authority raised the ratio, suggesting the group is growing increasingly desperate to cool inflation and avoid a potentially devastating asset bubble. Considering China is seen as the standout destination for growth and potential returns, their efforts to throw the breaks on the speculative trends are a moderating influence for the entire world.

From risk trends to fundamentals, there were significant indicators that would both bolster and undercut the outlook for supply-and-demand equilibrium. For oil traders, the US retail sales figures were perhaps the bright spot for an otherwise discouraging day for data. Delayed because of the snowed-in capital, the spending numbers would come out better than expected with a 0.5 percent increase through January. This would beat expectations and mark the third time in four months the series would climb – suggesting the American consumer (the world’s largest) was once again encouraging demand. However, this would prove the only tangible support fundamental traders would find on the day. Dimming the spending forecast, the University of Michigan consumer confidence survey would unexpectedly step back for its initial February reading. Far more influential though was the short-fall in the 4Q European GDP numbers. German (Europe’s largest economy) unexpectedly stalled in through the final months of the year while the broader Euro Zone expanded a tepid 0.1 percent over the three-month period. Considering Germany is largely dependent on manufacturing and exports, this is particularly discouraging for energy demand going forward. Turning from macro data to true market demand, today’s inventory and speculative positioning figures were very discouraging. The DoE reported US crude holdings jumped 2.42 million barrels last week to 331.4 million barrels to its highest level in two-months. Gasoline supplies jumped 2.32 percent to push holdings up to the highest level since March 14th of 2008. Taking a bead on speculative interest, net long positions among traders reportedly dropped 51 percent to 42,060 contracts according to today’s COT release.

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

Commodities – Metals

Gold Recovers Much of its Early Losses Thanks to an Anchored Dollar

Spot Gold  -  $1,090.80  //  -$4.60 //  -0.40%

Two of gold’s primary fundamental roles were in play Friday; and each would have a meaningful impact on price evolution. In the early trading hours of the Asian and European sessions, the commodity would tumble on news that China would take another definitive step towards cooling its markets. Raising the reserve ratio of the nation’s banks aimed at cooling the explosive loan growth in the nation; but it will also the effect of tempering growth and speculative turnover. Naturally, this move curbed an already fragile bounce in risk appetite that had developed after the EU confirmed it would rescue Greece yesterday. As a risky security, gold would shoulder this discouraging news and pullback from a notable, descending trend of lower highs that has developed since the market hit a record high in November. This aggressive run could have held through the end of the day; but another of the precious metal’s functions would step in and push it back towards its opening level. As a dollar hedge, the commodity is seeing another indirect connection to risk trends (as the greenback is one of the market’s favored safe haven currencies); but there are fundamental aspects for this benchmark that move beyond the realm of carry interest. After briefly testing a new seven-month high in the morning, the dollar would quickly retreat into the close of the day. Looking ahead to next week, the immediate concern for this commodity is the details to the Greek bailout. If it falls short, risk aversion can easily pick back up. It will be interesting to see though when/if gold can once again find its appeal as a safe haven asset. In the meantime, the COT report showed that speculative net long positions dropped 14 percent to 181,519 contracts in the week through February 9th.

Spot Silver  -  $15.49 //  -$0.17 //  -1.09%

A sharp turn in risk appetite would have a prominent effect on silver’s price action Friday. Through the morning, the transition from Greece bailout to China reserve ratio hike would send the speculation-sensitive commodity tumbling. However, a notable retracement in from the safe haven dollar through the active US trading hours would ensure no trend would develop before the week closes. Taking a look at price action over the entire week, this pair has carved a very clear and consistent rising trend channel. However, the gradient on the price action is gradual and has developed after a dramatic selloff over the preceding three weeks. From the CFTC’s positioning data, net speculative long interest dropped 24 percent to 23,365-contracts through this past Tuesday.

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Written by John Kicklighter, Strategist

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

Oil Climbs Back Above $75 as Greece Crisis Fears Subside, DoE Inventory Figures Approach

North American Commodity Update

Commodities – Energy

Oil Climbs Back Above $75 as Greece Crisis Fears Subside, DoE Inventory Figures Approach

Crude Oil (LS NYMEX) -  $75.40  //  $0.88 //  1.20%

A few prominent fundamental threats would pass Thursday with relatively little fanfare. While the uncertainty surrounding these individual events was ultimately a source of risk premium for the crude prices, the market’s rally this week has yet to flag. Looking at the active futures contract trading on the NYMEX, oil prices have advanced for four consecutive days. So far, this run has notable pulled the commodity up from multi-month lows, surpassed the former $72.50-support level and now bulls are holding the market above the closely-watched $75 figure. The primary fundamental driver for the day was the same theme that has controlled underlying risk appetite for nearly two weeks now: the development of the Greek debt crisis / bailout. After meeting in Brussels, the European Union came to an accord to provide aid to the suffering economy. However, officials have not yet decided on what kind of assistance they will provide. Naturally, if the market deems the steps fall short or are otherwise too narrow; the broad fear in risk appetite could once again return. Initially, speculators were discouraged by this uncertainty, but the capital markets would eventually recover lost ground and climb back above critical levels.

Risk appetite among the commodity set will maintain its overbearing influence when sentiment is once again on the move. However, in the meantime, other fundamental issues will leach into price action in the meantime. After the Greek announcement today, there were two other notable resolutions to particularly bullish aspects for price action over the past week. The blizzard that crippled the Northeastern United States has passed and left a considerable accumulation of snow in its path. Gauging the weather’s severity and its potential impact on demand was a practice in speculation; but now the market will wait until inventory reports confirm just how significant its influence was. Another looming hazard that has cleared was Iran’s announcement at the celebration of the 31st anniversary of the Islamic Revolution that the nation was now a nuclear power. While this will no doubt draw greater sanctions from worried international groups, the fact that the announcement was less confrontational was noteworthy. Moving to hard supply and demand statistics, the International Energy Agency followed the US Energy Department in raising its global oil consumption forecasts for 2010 up 1.8 percent over 2009’s average to 86.4 million barrels per day. For those keeping track of the gap between output and consumption, the gap is still extraordinarily high. On this front, the Department of Energy will report the delayed weekly inventory figures. The American Petroleum Institute’s report of a 7.2 million barrel jump in crude holdings (to an October high) will weigh heavily against DoE expectations for a mere 1.6 million barrel increase.

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

Commodities – Metals

Gold and Silver Rally as Risk Appetite Recovers, the Dollar Tumbles

Spot Gold  -  $1,093.44   //  $21.34 //  1.99%

There was one concern for gold bugs Thursday: Greece and the destabilizing effects it has had on the worldwide investor confidence. After rumors surfaced that the European Union and Germany were considering a rescue, risk appetite perked in anticipation of details to this supposed bailout. After a meeting of EU leaders in Brussels Thursday morning, the group purportedly reached an accord; but the particulars of the rescue were once again deferred. Temporarily satisfied with the concept that European neighbors would act to stabilize the struggling nation, speculators will still have to weigh in on the expected success of whatever measures will be adopted. Nonetheless, it is interesting to note the support this general guarantee has provided sentiment – suggesting this episode is more a crisis of confidence than a crisis of financial stability. For gold, the bounce in risk appetite would be further leveraged by the safe haven US Dollar’s retracement on the day. Furthermore, considering the relatively restricted losses the commodity suffered during the height of risk aversion; the precious metal may have also seen its safe haven aspect garner a little more interest. That will be something to watch out for when the details of the bailout do emerge.

Spot Silver  -  $15.63 //  $0.42 //  2.76%

With the cumulative effects of a rebound in risk appetite and subsequent dip from the US dollar, silver would see its biggest one-day advance since January 4th. However, despite the meaningful progress the metal made on the day, its overall range would not deviate from the average of the week. A restrained rising trend channel has developed since silver tested a five-month low last Friday. The market requires a clear drive in sentiment to produce its own trend. Will we see this before the week ends?

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

Oil, Gold to Follow Risk Trends on EU Summit Outcome

Commodities – Energy

Crude Oil Prices to Follow Risk Trends on EU Summit Outcome

Crude Oil (WTI)       $74.92       +$0.40       +0.54%
Prices have continued to advance along with overall risk sentiment after an article in yesterday’s Wall Street Journal suggested Germany was preparing to lead an EU effort to offer Greece loan guarantees to help quell jittery financial markets fearing a sovereign default within the Euro Zone. Policymakers are set to begin a summit on the matter at 9:15 GMT in Brussels, with an outcome to be announced at a press conference at 15:45 GMT. On balance, some sort of bailout is probable. From its inception, the European Union was always an arrangement grounded in geopolitical expediency rather than sound economics. This means that, tough talk about fiscal discipline notwithstanding, the EU does not see it as politically acceptable to allow an economic failure that would compromise the structural integrity of the regional bloc. Risky assets (including crude) are likely to see a boost after if a rescue package is confirmed, with significant resistance now seen just below the $76 figure. However, sentiment began to sour long before the Greek issue jumped into the forefront, suggesting that any resolution to the southern European country’s debt woes will be a temporary reprieve before risk aversion returns in earnest. In the interim, expectations of a lower print on weekly US jobless claims figures may also prove supportive.

Commodities – Metals

Gold, Silver to Extend Correction Higher on Firm Risk Appetite

Gold       $1080.08       +$7.98       +0.74%
As with oil, the EU summit in Brussels and its implications for risk appetite will shape near-term price action as the correlation between gold and the MSCI World Stock Index continues to read at a very significant 0.91. A break past $1086.05 will expose resistance at the top of a falling channel established from the swing high in January, now just at the $1100.00 figure. US jobless claims are set to decline ahead of the EU announcement, which may add further fuel to help propel the bullish correction further.

Silver       $15.45       +$0.16       +1.01%
Prices continue to tread water above the $15.00 figure. Silver’s correlation with the MSCI World Stock Index is even stronger than that of gold, registering at 0.99. This means the EU summit and US jobless claims are the items to watch here as well. US stock index futures are trading 0.7% higher ahead of the opening bell, bolstering the case for a near-term upswing.

Winter Storms and Bolstered Demand Forecasts offset Speculative Interests in Crude

North American Commodity Update

Commodities – Energy

Winter Storms and Bolstered Demand Forecasts offset Speculative Interests in Crude

Crude Oil (LS NYMEX) – $74.48 // $0.74 // 1.00%

Through other asset classes were little changed on the day, crude proved to have a considerable supply of bullish pressure behind it Wednesday with an advance that would carry the commodity up to the closely watched $75 level. However, the path to this resistance point was certainly not linear. In fact, oil prices would show a dramatic bear and bull swing through the active pit trading hours of the US session. Picking apart the many fundamental catalysts for the day, risk appetite lost much of the pull it would evoke yesterday. Following yesterday’s rumors that Greece would find financial aid from either Germany or the European Union, the market has gone quiet to await the release of any plans that are put forth. Regional leader are expected to gather for a summit tomorrow; and market participants no doubt expect details for whatever approach they may agree on sometime in the middle or late hours of the European session. No doubt, a package that includes loans would be considered a meaningful support; but the more likely outcome of loan guarantees may not suffice. Fears that that the group could fall short bolstered the US dollar (a safe haven) through the early New York session; and crude would suffer in turn.

Outside the influence of pure risk appetite trends, oil traders would find plenty of news on their plate to digest. The winter storm that meteorological services have predicted for the US East Coast for days would finally descend on the major cities. With an expected snowfall of 20 inches, business and transportation hubs from New York to Philadelphia to Washington DC would grind to a halt. Considering this region of the United States accounts for approximately 80 percent of the entire nation’s heating oil consumption, this event clearly has its bullish implications. Then again, the fact that it has significantly reduced business output in the region also has its impact on demand. Speaking of demand, the US Energy Department would release its Short-Term Energy Outlook. Forecasts for global oil consumption were lifted from 85.18 million barrels per day to 85.3 million barrels through 2010 while the average price through the year was lowered from $79.83 to $79.78. On the other hand, the more highly anticipated report from the DoE (the weekly inventory figures) was delayed until Friday due to the inclement weather shutting Washington DC down for the day. Nonetheless, anticipation for this report has increased recently due to the API’s report of a 7.2 million barrel increase in crude stockpiles in its own reading. This substantial increase pushed overall inventories to 337.6 million barrels – the highest level since October. Another developing threat for the energy market are the tensions building between Iran and the international community. The US took the step of freezing the assets of four companies that have ties to Iran’s Islamic Revolutionary Guard Corp.

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

Commodities – Metals

Momentum Eludes Gold Again as Market Sentiment Settles and the Dollar Advances

Spot Gold – $1,072.00 // -$6.10 // -0.57%

Though gold has been able to climb back above $1,075 (a level that proved difficult to breach as a level of support through December and January), the metal has established little in the way of momentum to establish a sense of conviction behind an otherwise high level of volatility. Yesterday, the commodity was unable to capitalize on the sharp rebound in risk appetite and drop in the US dollar; and today, a stabilization in investor sentiment wouldn’t offer the traders a second chance to correct this unusual break. Through the European and US hours, news that the European Union was scheduled to convene in Brussels tomorrow to discuss the assistance the region should extend Greece led investors to forestall major investments or divestments. However, the rumor mill would run despite a lack of tangible data. According to unnamed sources, the EU is likely to extend loan guarantees to the financial strapped economy while Germany is contemplating options that could offer something more. While loan guarantees should be all that is needed to reestablish confidence in Greece’s efforts to work down its deficits; a general sense of risk aversion could negate the positive implications such a move would entail. This doubt would bolster the safe haven greenback and thereby weigh on the market’s favored dollar-hedges – including gold. Additional support would come to the single currency by way of Fed Chairman Bernanke’s commentary to the House Financial Service Committee. Though the central banker said he saw little room for tightening monetary policy in the near future, he suggested the discount rate could be lifted “before long.” To speculators, this is a hawkish step and an additional step to fight inflation.

Spot Silver – $15.12 // -$0.25 // -1.60%

Silver would put in for a higher high and higher low Thursday; but the commodity would nonetheless suffer from restrained momentum and a general lack of direction. Yesterday’s advance (the first for the commodity in the past five days) proved temporary as speculation over an imminent bailout for Greece has turned into ‘wait-and-see’ scenario. Considering the broader markets have afforded the EU meeting tomorrow so much attention, there is little doubt that it has the potential to command volatility and trend for silver and most other risk-sensitive asset.

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

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