Technicals

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

North American Commodity Update

Commodities – Energy

The Longest Build in Inventories in Five Years Turns Crude to its First Lost in Seven Days

Crude Oil (LS NYMEX) – $85.95 // -$0.89 // -1.02%

After forging a remarkable breakout to a 17-month high and subsequently extending the longest bull trend since the December/January rally, crude was would have to eventually trade speculative momentum for fundamental drive. This switch proved unfavorable for the commodity. The first decline in seven days Thursday was partially the response to breakout exhaustion; but it would further align itself to a disappointing round of fundamental data and more importantly to the consensus on risk appetite across the financial markets. Looking for guidance on investor sentiment, we can see that crude was advancing on its own momentum. Looking to other recognizable benchmark’s measures of traders’ appetites, we see that the Dow Jones Industrial Average has found itself unable to surpass 11,000, while Wednesday’s decline was the biggest in six weeks; and carry interest continually loses momentum in its two-week advance. Given this general consensus, strength in oil from a speculative perspective is diverging far from what markets would suggest is reasonable. As a measure of the inactivity of the markets and lack of concern over a possible reversal, the CBOE Crude Volatility Index is hovering just above a 27-month low at 29 percent. In addition to the negative bias contributed by risk trends, the dollar’s strength through the day would add additional weight to the commodity as the primary pricing instrument for spot and futures transactions in the Western hemisphere.

It is possible for a market to overlook a technical or speculative sense of overbought and oversold given the correct fundamental contributions. Over the past few days, strong economic data and the support to growth that the Fed’s dovish monetary policy position leaned towards offered a boost to the production/consumption equation exactly where it was needed: long-term demand. However, this positive outlook was undermined by today’s data. Most pertinent for energy traders was the greater-than-expected 1.976 million barrel increase in the Department of Energy’s crude oil inventory figures for the week ending April 2nd. This increased net holdings to 356.2 million barrels; but more importantly the growth trend is the longest since the 11 consecutive weekly increased through December 3rd, 2004. Other statistics from this data release were similarly discouraging. Crude imports rose 5.5 percent to 9.56 million barrels – the highest level since September. So, while refineries may be operating at their highest levels since October (at 84.5 percent) there is little significant price threat to come from the supply side. In macroeconomic news, the final reading of the fourth quarter Euro Zone GDP numbers were revised down. The region reportedly stagnated through the end of the year with a deeper than expected 2.2 percent drop in consumer spending. Adding to the discouragement UK service sector activity would pullback form a more than three-year high in its March reading and US consumer credit numbers dropped for the 12th time in 13 months – a sign that the world’s largest consumer base will not turn to financing to compensate for high unemployment and receding wage growth.

Commodities – Metals

Gold Rallies to a 12-Week High as Sovereign Debt Risk Outweighs Dollar Strength

Spot Gold – $1,149.70 // $15.40 // 1.36%

While most other capital markets were on the lam, gold put in for a remarkable rally Thursday morning. While there was a fundamental component to the period’s advance, there is little doubt that the metal was enjoying a certain degree of momentum from its own appeal as a speculative asset. Jumping from its two-week rising trend channel, spot would clear its March 3rd swing high at $1,145 and move on to twelve-week highs. For a fundamental footing, the commodity’s appeal would stem from ongoing concerns over the deterioration of sovereign credit ratings and its very real influence over fiat assets. Turning once again to Europe, fears that Greece is heading towards a financial crisis and possible default (should the rescue plan fall apart, as seems likely at this point) would drive the spread for the nation’s 10-year debt to a new record above its German counterpart. Reminding the market that the troubles in the European region are not isolated to Greece, the final reading on fourth quarter GDP was revised down to no change. Without a significant economic recovery, the financial troubles in the region will further weigh on governments’ ability to work down deficits and stabilize their markets. In fact, the concern that there is no reserve fiat currency safe enough to stand as a secure store of wealth has become so prominent amongst gold traders that other fundamental roles (like the metal’s value as a speculative asset and dollar-hedge) have been temporarily overlooked. However, as with oil, the commodity can only ignore these other drivers for so long.

Spot Silver – $18.18 // $0.24 // 1.34%

Silver overtook a temporary technical boundary of congestion Wednesday and progressed to its highest level since January 20th. This advance – and its relatively tame pace – resembles the advance that the Dow has maintained for a few months now. However, the unique influences of the US dollar and the correlation to gold have stepped in to further alter silvers pace and pitch. Today, a pullback in equities (drop in risk appetite) and advance in the US dollar were outweighed by the influence that the commodity’s more expensive counterpart has enjoyed.

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

The Biggest Drop in Two Weeks Helps Confirm a Crude Reversal

North American Commodity Update

Commodities – Energy

The Biggest Drop in Two Weeks Helps Confirm a Crude Reversal

Crude Oil (LS NYMEX) – $79.86 // -$1.38 // -1.70%

A sharp decline through the week’s open for crude is a convincing sign that the market has indeed reversed course after running a five-week bullish trend and just before testing two-month highs. In fact, the active futures contract on the NYMEX would put in for the biggest single-day decline in two weeks, a move that would subsequently confirm the first back-to-back daily loss for the instrument since the February 4th/5th plunge. This rally would have a tangible, fundamental component; but much of the influence is traced back to sentiment considerations. Having rallied through most of February and the first half of March, speculators have come to a point where optimism has to be reconciled with realistic projections for risk appetite and demand for the physical. With a 16-month high in view, a critical assessment of progress in speculator positioning and economic activity leaves little room for further appreciation even if investor interest was capable of surpassing the closely watched $84 level. This may seem to stand in contrast to the rise in open interest in the futures market (currently at a 21-month high 1.4 million contacts); but speculative interest can often diverge from practical demand expectations. It Is the correction whereby sentiment meets reality that often introduces the beginning of new trends.

Looking further into the contributing factors to today’s tumble; there was plenty to garner from investor activity and macro economic data. Through the typical channels of risk appetite developments, equities were little changed; but the US dollar would put in for a significant advance – the first in four days. This mixture of tempered optimism and rising pricing instrument naturally translates into a cheaper commodity. Combining the concerns of demand from the speculative and growth factions of the market, Moody’s suggested in a report Monday that the US and UK were putting in for the swiftest move towards losing their respective top sovereign credit ratings. Just the fear of rating cut will encourage higher borrowing costs for the economic powerhouses that will curb speculative interests and the governments’ ability to stimulate their economies. On the data front, US factory output rose a meager 0.1 percent through February – a respectable number given the unfavorable conditions of the period (weather). For a global perspective, the world’s second largest economy (Japan) received an upgraded bill of health by the government and a rise in consumer sentiment. Looking out over the next 24 hours, the big-ticket economic indicators will either compliment or work against dominant risk trends. Furthermore, later in the session, the API crude inventory report will reintroduce supply-side considerations to the fundamental picture.

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

Commodities – Metals

Gold Levels off as Sovereign Debt Concerns Balance Dollar’s Controlled Recovery

Spot Gold – $1,107.90 // $6.01 // 0.54%

Combining the value of a speculative instrument, dollar-hedge and safe haven asset; gold traders would have to indentify which factor was most important for establishing a fundamental bearing. As for risk appetite, European equities were notably lower on the day while US shares finished the session little changed. Furthermore, the US dollar would put in for a hearty advance against its most liquidity counterparts. Normally, the combination of these two factors would lead the precious metal lower; but gold would ultimately put in for the biggest advance in 8 days. So what then was the source of this commodities strength? Over the past year, this instrument’s function as a safe haven has generally diminished as the appetite for yield and capital returns has leveraged the metal’s volatility and preternatural climb to record highs. However, the demand for an alternative investment today takes on a new face: balancing the risk of a depreciating fiat currency. Sovereign debt concerns were leveraged Monday by suggestions that EU officials, through their two-day meeting, wouldn’t produce a meaningful backup plan to bailout Greece or any other member nation that fell on hard times. In fact, Finance Ministers for both Germany and France would go into the discussion vowing that no major changes in policy would be made. This leaves the region open to another adverse turn in sentiment. Far more surprising however was the warning issued by Moody’s that most of the world’s largest industrialized nations had moved “substantially” closer to seeing the credit ratings downgraded. At the front of the line was the US and UK. If these economies’ debt worthiness was indeed lowered, the impact on the credit market would be felt world-wide.

Spot Silver – $17.10 // $0.03 // 0.18%

Without a prominent attachment to sovereign credit interests and safe haven flows, silver would look for guidance from its more typical drivers. Despite the tumble in European equities, investor sentiment was ultimately little changed through the end of the trading session. More interesting was the commodities response to the US dollar. The first advance in four days would leverage a significant precession on the precious metal; but the metal would ultimately absorb the ‘cost.’ Taking stock of price action, the active silver futures contract on the COMEX has seen the smallest rolling average daily range for the past month since February 2nd. This was the period just before the sharp plunge and steady reversal. If history is any guide at all, the future may point to more active markets in the near future.

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

Speculative Interests Override Inventory Gains to Lift Crude Prices

North American Commodity Update

Commodities – Energy

Speculative Interests Override Inventory Gains to Lift Crude Prices

Crude Oil (LS NYMEX) – $80.17 // $1.31 // 1.66%

The fundamental landscape was busy Wednesday. Nevertheless, crude would once again fall back on its correlation to risk appetite trends to establish direction and volatility. While the Asian session was dominated by selling pressure for capital assets, optimism would recovery heading into the European and US session. This same sequence of price development can be seen on the intraday crude chart. Before the US session started, the active futures contract on the commodity would pull back to $78.25 – testing a notable channel floor. From this trough, trades drove oil 2.8 percent higher to the top of this week’s range capped at $80.50. While this seems a clean move, it does draw a few inconsistencies. From the futures market, we can see that volume has steadily declined through the past three weeks’ bull trend and open interest has followed a similar pattern. Another interesting point is the relaxed correlation between oil and the US dollar. Normally, the two hold a highly negative correlation that reflects their respective roles in the risk spectrum. Yet, today, the both crude and dollar followed an Asian session contraction and subsequent recovery. This could simply be labeled a break from pace for the currency; but in truth, this is a read on underlying sentiment trends. When the trend behind risk appetite or aversion eases, the correlation between markets begins to breakdown. If this indeed the case now, the market could be simply floundering until a clear direction is once again established.

Looking at the headlines, there were more than a few events that threatened to trigger volatility and perhaps set off a clear trend for the commodity. The most distinct threat for energy traders today was the weekly Department of Energy inventory figures. The Tuesday afternoon API (American Petroleum Institute) numbers set a bullish lean on expectations after the group reported a 3.14 million barrel increase in stockpiles. This was the biggest drop in holdings for this series in two months. In the meantime, the official consensus for the DoE report was set for a 1.9 million barrel increase. Some may have believed they had an upper hand on those that weren’t paying close attention; but the week-to-week divergences between these two reporting agencies was made clear when the DoE figures reported an impressive 3.03 million barrel increase in crude holding for the week ending February 19th. This marked the fourth consecutive increase in inventories (the longest trend of gains in nine months) to 337.5 million barrels (the highest overall level since November). The surprise quotient here was clear; but the oil prices would quickly adapt to the ‘disappointing’ figures and realign with risk appetite. In fact, this advance in sentiment was so strong, it would also survive a sharp drop in US new home sales to a record low as well as moderately discouraging testimony by Fed Chairman Bernanke and Treasury Secretary Timothy Geithner.

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

Commodities – Metals

A Dollar Recovery Sends Gold Below $1,100

Spot Gold – $1,097.75 // -$5.65 // -0.51%

Usually, the multiple roles gold plays in the global financial markets align to give the commodity a clear bearing and sense of momentum. However, convictions were clearly tempered as a few of the assets more influential functions were running in opposing directions. The biggest break for gold bugs was the divergence between risk appetite trends and the US dollar. Typically, the greenback acts the part of a safe haven and responds to appreciation in growth-linked assets (like equities) by falling. In a break from the norm though, a slow but steady advance in equities was running side-by-side with a rise in the currency. This forced gold trades to decide whether the commodity’s utility as a speculative asset or dollar hedge was more important. In the end, the currency’s appreciation proved dominant. This is an interesting break of pace and perhaps speaks more broadly of gold’s fundamental value beyond its supplementary roles. At its current highs, it is perhaps difficult to support the notion that this commodity makes for a low risk alternative to other securities that often provide a yield. On the other hand, the CBOE’s gold volatility showed activity levels fell to a three-week low while both open interest and volatility have extended their retracements. If a clear and momentous change in sentiment were to develop, gold activity levels would likely rebound and the cross-market correlations would likely return.

Spot Silver – $15.97 // $0.14 // 0.88%

Silver would put in for a positive close; but the price action that preceded the break may have weakened bulls’ conviction. An intraday tumble below $15.75 may not have breached a notable psychological level that has defined price action this past month; but it has broken the steady, rising trend channel that has developed from the February 5th reversal. From a fundamental standpoint, the split between the dollar and risk trends as primary fundamental drivers led to confusion for direction for silver. Looking at market activity, aggregate open interest has slipped to its lowest level since early September. On the other hand, the average level of volume has risen back to highs not seen since early December.

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

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

Oil 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 Supported by a Sharp Rebound in Risk Appetite on Speculation of a Greek Bailout

North American Commodity Update
Commodities – Energy

Oil Supported by a Sharp Rebound in Risk Appetite on Speculation of a Greek Bailout

Crude Oil (LS NYMEX) -  $73.87  //  $1.98 //  2.75%

A clear sign that risk appetite is still the dominant fundamental driver for crude traders, oil futures trading on the NYMEX exchange rallied mid-day in the New York trading session along with many other risk-sensitive securities on heightened speculation that Greece would be bailout by either the EU or Germany. Mimicking volatility in stocks and currencies, the active crude futures contract rallied as much as 3.5 percent and handily overtook the closely watched $72.50 level. Now, the market is hovering between the aforementioned pivot and the $75 figure that has similarly offered trouble for trend progression in the past. Where the market goes from here is almost certainly a question that will be decided by the resiliency of investor sentiment. The advance for the commodity today would come amid extraordinarily high levels of correlation between the different asset classes. This is an important distinction to make; because assigning responsibility for today’s oil advance to rumors surrounding a bailout for Greece would otherwise be too oblique to make sense. In the past month, the shift away from assets that depend on capital gains and volatility to financial safe havens has found a symbol of uncertainty in this single nation’s fiscal struggle. Naturally, evidence that suggests conditions will improve for Greece, will temper risk premium associated specifically with this isolated situation. However, that does not fundamentally alter the true source of market risk or even the broader perception of stability. Only time will tell whether optimism will truly recover or falter in its recent, temporary rebound.

From risk appetite to true supply/demand fundamentals, the pressure for a temporary rebound in crude is building up. Much of the Northeastern US is under a severe winter storm warning with significant snow accumulations expected for New York, Washington DC, Philadelphia and other major cities. Considering this region accounts for fourth-fifths of total natural gas demand in the United States; this storm will have no small impact on speculative interests. Speaking of speculative concerns, China Investment Corporation (the country’s sovereign wealth fund) reportedly invested in the US Oil Fund by buying 2 million shares of the ETF that represented 3.48 percent of the outstanding interest. Another story to monitor is the international focus on Iran. State-run media reported efforts to enrich uranium for research purposes had begun despite the threat of greater sanctions. As OPEC’s second largest oil producer, international relations with Iran are important. For the immediate future, traders will look to the US Energy Department’s numbers. The weekly inventories are scheduled for release tomorrow; but it is not clear whether the figures will be reported due to inclement weather conditions shutting the government down in Washington DC. The same goes for the Short-Term Energy Outlook whose release was deferred today.

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

Commodities – Metals

A Recovery in Sentiment and Drop in the Dollar Support Gold and Silver Prices

Spot Gold  -  $1,075.71   //  $13.86 //  1.30%

Rumor and speculation that officials would soon announce a bailout plan for Greece would spread quickly across the market. For gold, the commodity’s own status as a speculative asset would as well as its role as a dollar hedge would help the market eke out a meaningful advance on the day. However, it is notable that this specific metal’s reaction would be relatively limited compared to other benchmarks like the Dow Jones Industrial Average and the US dollar. At the height of risk appetite for the day, gold would advance only 1.9 percent – a far more limited move than the plunge last week. What does this mean? Perhaps it is a sign that fiscal stability for Greece is not the ultimate concern for global investors. Beyond this single economy, other EU members like Portugal, Spain, Ireland and Italy could be in next in line to face the critical eye of the skeptical market participant. On the other hand, this tempered response could be a factor of gold’s own value to the market. Aside from its use as a speculative asset, the precious metal is also considered an inflation hedge and relative safe haven. As for its dollar connections, today’s advance in sentiment weighed the benchmark currency down from eight-month highs. However, the greenback is finding fundamental strength on its own; and the concept of buying on the ‘cheap’ in anticipation of a broader market recovery is more difficult to justify for the still expensive commodity. Measuring the specific influence of risk appetite, the dollar and inflation will be important to defining trend going forward.

Spot Silver  -  $15.45 //  $0.45 //  3.00%

Just as surely as it would amplify silver’s losses, the commodity’s leveraged exposure to risk appetite and the US dollar would lead the metal to a more aggressive rally than its more expensive counterpart. The currency would suffer its biggest daily loss against its primary counterpart (the euro) Tuesday; and silver would respond in kind with its biggest rally since January 4th. From a traders’ perspective, the metal has a considerable way to go before reaching $16 once again. On the other hand, there are clear levels for other asset classes that could like a jumping point for underlying sentiment.

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

Written by John Kicklighter, Strategist

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

Crude Oil Rises for the First Time in Six Days on Thin Liquidity

North American Commodity Update

Commodities – Energy

Crude Oil Rises for the First Time in Six Days on Thin Liquidity

Crude Oil (LS NYMEX) -  $78.25  //  $0.25 //  0.32%

Constrained liquidity helped crude traders snuff out a burgeoning bear trend Monday. With the US market offline for a bank holiday, the benchmark oil contract was able to post its first bullish close in electronic trading in the past six trading days. However, it is because of this limited speculative interest that we have to take this opening move with a grain of salt. Nonetheless, there were fundamental considerations to work with for those that were still trying to make trades in the thin market conditions. First and foremost, for those that are monitoring inter-market correlations; modest dollar weakness through the day encouraged a tempered strength from the speculative asset. On the other hand, it bears mention that the benchmark currency has not defined a clear direction for itself in nearly a month. Considering the greenback’s association to underlying sentiment and its role as the primary pricing instrument for commodities, it is worthwhile to await a clear bearing on this instrument before marking a definitive trend on oil.

Through more mundane and definable channels, supply-and-demand fundamental would also be in play Monday. In the early trading ours, China Oil, Gas & Petrochemicals issued forecasts for Chinese imports to increase up to 15 percent through 2010 as the nation enters the second phase of its plan to build strategic reserves. Perhaps more influential however were remarks from the Qatar Energy Minister who speculated the Organization of the Petroleum Exporting Countries (OPEC) would not raise output through the year, as current supply levels would be sufficient. However, looking through the rest of the week, output and consumption considerations may not work in bulls’ favor. This past week the Department of Energy reported a 3.699 million barrel increase in crude inventories despite frigid temperatures that would have theoretically boosted demand. Should this week’s stockpile report (due Thursday) issue another increase in holdings, it would be a sign that excess capacity can easily fill in should a temporary spike in demand present itself. The level of true fundamental demand is important to set against speculative interest as well. This past week, the CFTC’s Commitment of Traders update reported speculative long positions hit their highest levels since 1983 (at 135,669). Is this a leading indicator or simply a lagging reaction to the aggressive run up through the opening week of January?

Commodities – Metals

Gold Gears Up for Possible Breakout as Liquidity Fills out and Speculation Recovers

Spot Gold  -  $1,133.60   //  $2.68 //  0.24%

Though there was plenty of activity in speculative markets through the Asian and European sessions, gold as little moved through Monday’s session. Considering the terminal congestion pattern the commodity has worked its way into over the past few weeks, it comes as little surprise that traders would defer a decision on market direction for when US liquidity is back on line. As for background fundamentals, there was plenty for traders to contemplate through today’s restrained session. At the front of traders’ minds was the modest decline in the US dollar. As for speculative interests, there were moderate trends developing amongst the larger indices in the world’s more liquid markets – though they would essentially offset each other. Asian equities would tumble on the day with the Nikkei leading the way with a 1.2 percent slump through the opening day. In contrast, European indexes were on the rise with a 0.72 percent advance from the FTSE 100.  Looking ahead to deeper and more active markets for Tuesday, we may actually see the metal’s function as an inflation hedge come into play. This morning, Australian consumer and UK housing sector inflation figures boosted price pressures. Tomorrow, UK and New Zealand CPI indicators will add to the mix. However, everything considered, speculative interests hold the greatest potential for volatility.

Spot Silver  -  $18.64 //  $0.23  //  1.25%

Silver would work its way even further into a congestion pattern Monday with thin trading discouraging a clear bias on price action. That being said, the return of market depth Tuesday could encourage a rebound in volatility. If there is in fact an increase in activity, there is little room for this metal to move before spot threatens a potential breakout. Speculative traders will be particularly sensitive to volatility through the first full trading day of the week and will look to key market benchmarks (like The Dow and US dollar) for guidance.

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

A Drop in Crude Inventories Pushes Oil to the Brink of a Breakout but Hesitation Persists

North American Commodity Update

Commodities – Energy

A Drop in Crude Inventories Pushes Oil to the Brink of a Breakout but Hesitation Persists

Crude Oil (WTI) -  $79.54  //  $0.40 //  0.51%

As expected, the steady build in inventories was temporarily halted last week owing to the disruption by Hurricane Ida (the first significant storm to pass through the Gulf of Mexico). However, it seems market participants were prepared for the bullish supply-side data because oil has so far been unable to capitalize on the announcement to catalyze a meaningful break from its month-long, descending congestion pattern. Top news this morning was the US Department of Energy’s stockpile figures for the week ending November 13th. The headline figures were exactly what bulls needed to mount an assault on the steady, falling trend that has developed since the late-October high. Expected to rise a modest 300,000 barrels following the previous week’s 1.762 million increase; crude inventories actually dropped 887,000 barrels. Gasoline stores dropped 1.755 million barrels against a forecast of a 25,000 decrease while distillate inventories fell less than expected by 328,000 barrels. Historically, these are relatively modest contractions and surprises; but the data’s impact was rendered even more impotent by yesterday’s API numbers. According to the industry group’s measurements, crude inventories plunged 4.37 million barrels. In fact, the typically less-market-moving report would further outshine its government counterpart by showing crude output levels at its highest levels in four years through October while gas deliveries (a sign of demand) fell for the first time since May. Consumption through the first 10 months is down 4.5 percent from the same period a year ago.

What will be the lasting effect of this week’s DoE and API reports? These two reports showed exactly what was expected considering imports through the Gulf of Mexico dropped 16 percent due to the storm. And, just as surely as inventories contracted in response to the weather, stockpiles will rebound as things return to normal. Demand is the primary concern at this point in the game as the world’s major energy producers have indicated that they were comfortable with current levels of output as they try to offset the drop in prices on revenue by bolstering output. Taking a look at speculative trends for the day, we could have seen a very different outcome if risk appetite had advanced with any significant momentum. However, both the Dow Jones Industrial Average and US dollar would carve a path for tepid risk aversion. Considering the 20-day moving average (approximately a month) for volume is near a record high – surpassing activity through the peak in 2008 – a trend revival or reversal will likely be a major event.

Commodities – Metals

Gold Hits another Record High above $1,150 before Risk Appetite Stalls

Spot Gold  -  $1,143.70  //  $2.40  //  0.21%

Volatility would ease slightly for gold Wednesday and the session would essentially lack a defined sense of direction; but momentum would nonetheless sweep the precious metal to a new record high on an intra-day basis and through the close. However, despite the relatively stable pace for the commodity, fundamental interest actually received a boost through the session. A report released by the World Gold Council said investment in gold-based ETFs rose 68 percent in the year through the end of the third quarter to $55.5 billion. This could still be a construed largely speculative interest that has already been over-extended. Yet, today hedge fund manager John Paulson announced he plans to launch a new gold fund on January 1st with $250 million – meaning there is still speculative interest to push the market even higher.  Besides its role as a speculative asset, the metals value as an inflation hedge was bolstered by an ongoing recovery in the US consumer-based inflation data. The annual pace is now showing a modest 0.2 percent contraction – a substantial improvement from the near, six-decade low set only this past July.

Spot Silver  -  $18.52  //  $0.10  //  0.53%

Silver, keeping with the strength of its more expensive counterpart, showed considerable resiliency Wednesday to the late-session pull-back in sentiment. The commodity rose to a high of $18.84 – its highest level since July 17th last year – before retracing nearly three-fourths of its gains to close the day. For specific asset demand, ETF Securities reported its silver holdings rose another 0.1 percent to a record 22.535 million ounces.

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

Oil and Gold Rallies Stalling

Crude

Crude oil broke above a double top in mid October but has failed to extend its rally after finding resistance from a fromer 4th wave near 80.  Still, the series of higher highs and higher lows is bullish until broken (although RSI divergence warns of a high).  74.00 is potential support.  The top of a channel intersects with a measured level at 92.57 in early December.   

Gold

Gold continues to soar following the triangle break in August.  However, there are plenty of warning signs that at least a setback is due.  5 waves up from 931.30, divergence with RSI, and the fact that the rally has reached several common measurements (including wave v of the rally being equal to 61.8% of waves i-iii).  Bottom line – respect any weakness.

Crude Oil Trades at Critical Resistance

Crude oil prices previously thundered through trendline support, but the break above trendline resistance led to impressive gains through recent trade. The commodity now trades near previous double-peaks at approximately 76.00, and the next day or so of price action could prove critical to broader direction. Near-term support is seen at congestion near 72.50, while a break of 76 resistance opens up a continuation of recent gains.

Gold prices have set fresh record highs through recent trade, hitting substantially overbought conditions on daily oscillators and showing few signs of slowing. There are obviously no historic levels from which to draw resistance, except to note that price cannot go higher indefinitely. Nearest support is at the psychologically significant 1050 and 1000 marks.

Silver has put in similarly impressive gains, but the mostly industrial metal nonetheless trades at fairly clear technical resistance. The 18.000 mark is a clear psychological level and likewise represents the top of the pair’s year-to-date rising trend channel. Failure at said mark leaves the metal at risk of sharp declines, with next real support not seen until clear congestion at 17.000. Risk/reward favors a short from these levels.

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