Commodities

Crude Edges Ever Higher as Momentum Substitutes Fundamental Drive

North American Commodity Update

Commodities – Energy

Crude Edges Ever Higher as Momentum Substitutes Fundamental Drive

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

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

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

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

Commodities – Metals

Despite Stable Risk Appetite Trends, Gold Suffers a Significant Correction

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

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

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

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

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

Commodities

Oil, Gold Threatened as Greece Sinks Risky Assets

Commodities – Energy

Oil Prices Threaten Support as Greek Downgrade Threat Sinks Risky Assets

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

Commodities – Metals

Gold, Silver to Extend Losses as Risky Aversion Gains Momentum

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

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

Commodities

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

Commodities

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

Commodities

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

Commodities

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.

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

Commodities

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

Commodities

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

Commodities

Oil Marks a Critical Trend Break as Sentiment Extends its Descent

North American Commodity Update

Commodities – Energy

Oil Marks a Critical Trend Break as Sentiment Extends its Descent

Crude Oil (LS NYMEX) –  $71.02  //  -$2.12 //  -2.90%

After suffering its largest single-day decline since July Thursday, crude would put in for a relatively volatile finish through the end of the week. It didn’t take long in the overnight session for bearish sentiment to build up once again and drive the commodity through critical support. While $72.50 may seem a relatively innocuous level, it represented the confluence of a historically well-tested barrier (as support and resistance) and the current standing of the rising trend of lows going back to last year. At its lowest point, Friday’s session losses totaled as much as 5 percent – establishing an incredible, intraday bear trend. However, the selling pressure wouldn’t last through the end of the session and week. The market-wide unwinding of risky positions has also encouraged a considerable interest from bears to actively short this impressive run. Moreover, as the weekend comes to a close, traders are taking the opportunity to book profits – subsequently pulling the market’s up from their lows. For oil though, the breach has been made and fundamentals are supportive of a bearish phase as long as speculative interests are either negative or otherwise tame.

In fact, we have seen relatively little on the fundamental front to suggest excess oil inventories will be absorbed or that production will be meaningfully reduced until an equilibrium is found once again. The week-to-week changes in US inventories for crude, gasoline and distillates do relatively little to change total reserves in the states much less for the entire world. Furthermore, with news that OPEC will increase its shipments through February and economic activity will be slower to recover than what speculative markets have priced in. Data today has produced little in the way of pull through demand expectations. The non-farm payroll (NFP) report is considered one of the most accurate leading indicators for the United States (the world’s largest energy consumer). With that in mind, the unexpected 20,000-job drop in net payrolls through January offered a dose of reality that contrasts the cheering at the previous release that offered the first net increase in employment in two years through a revision of the November reading. As policy makers and central banks have warned the world over, the world is on pace for recover; but the pace will be sedate for some time.

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

Commodities – Metals

Gold Retraces Friday’s Losses but Bear Trend Still Intact

Spot Gold  -  $1,063.50   //  -$0.20 //  -0.02%

Where can gold find its fundamental relief? The precious metal plays the distinct roles of speculative asset, safe haven, and dollar and inflation hedge. Few of these traits were working in the commodity’s favor Friday or through the entire week. There is still some bullish influence through the need for an investment that can offset the threat of accelerating price pressures in the coming months and years. However, inflation is barely showing up through the short-term and there is little threat of medium-term pressures exceeding the targets that most central banks are targeting. In contrast, the stress on underlying sentiment and its subsequent influence on the US dollar have put the record highs that gold recently tested into deep relief. From a traders’ perspective, the speculative capital that has found its way back into the market has artificially inflated those asset classes that can produce capital gains. Yet, this mass return of funds is avoiding more liquid securities (Treasuries) and is further concentrated by the loss of derivatives and other assets that absorbed much of the froth during the height of the market’s rally. With the Dow pushing 10,000, the dollar advancing to an eight-month high and oil marking a potentially-critical break; risk aversion can maintain its influence over the market for some time.

Spot Silver  -  $14.95 //  -$0.31 //  -2.03%

Though the silver’s tumble through Friday was nowhere as aggressive and consistent as the previous day’s plunge, the progress the commodity has made this past week is the real takeaway. Where gold can salvage lost ground through its claims to a history as a safe haven or speculation that central banks will look to load up on the metal to offset their US dollar exposure; silver’s primary role in the market is as a speculative asset. Therefore, as the market extended its risk aversion trend and the dollar pushed higher, the more affordable metal would push its way down.

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

Commodities

Oil Market Devastated by Plummet in Risk Appetite but Larger Trend Still in Place

North American Commodity Update

Commodities – Energy

Oil Market Devastated by Plummet in Risk Appetite but Larger Trend Still in Place

Crude Oil (LS NYMEX) -  $72.98  //  -$4.00 //  -5.20%

It wasn’t difficult to spot the fundamental driver to crude’s massive decline today. Risk appetite weighed all risk asset classes down with the largest collective drop in capital markets in over six months. For oil, the statistics were not much better than average. The commodity plunged over 5 percent through the day – the biggest single-day decline for the benchmark since July. However, for chart readers, today’s losses could merely be chalked up to a severe decline and not a full bear-trend development should the market move in to protect the $72.50. Like 10,000 for the Dow, this level is easily recognized by speculators and commercial investors alike. Furthermore, with the media attention that the market losses of the past month have generated, crude will grow increasingly sensitive to any and all market fears that emerge from scheduled and exogenous event risk. For today’s sharp declines, the fundamental impetus has been associated to a refocusing on “periphery-European” member event risk and positioning unwinding ahead of Friday’s US payroll report. These are no doubt contributors; but the bearish pressure has truly been building for quite some time; and today’s increase in activity is just another volatile start to a bigger correction.

Looking ahead to tomorrow, energy traders will be looking to the Dow Jones Industrial Average and the US dollar for cues on the direction of crude. The benchmark equity index is among the best measures for underlying investor sentiment because the rising risk appetite translates almost directly into buying while a turn in risk appetite will lead to a wave of selling. For the dollar’s part, the global benchmark stands as the market’s primary safe haven currency. Furthermore, the currency’s reaction to sentiment shifts will leverage oil’s own response as a speculative asset as the greenback is the primary pricing tool for the commodity. In the background, the big picture glut in inventories and stark lack of demand following the worst global recession in recent history is enabling crude to make progress on changes in risk appetite. This week’s DoE numbers reported refinery activity in the world’s largest economy fell to its lowest percentage of capacity (in periods not effected by hurricanes) since at least 1989. The effort to curb supply is being made; but without a meaningful increase in demand with a recovery in economic activity, the gap between consumption and supplies will remain extraordinarily wide.

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

Commodities – Metals

Gold Suffers Its Largest Single-Day Decline in 14 Months and Breaks Support Along the Way

Spot Gold  -  $1,062.30   //  -$47.50 //  -4.28%

The entire metal complex was tumbling through Thursday’s active session; but gold took the lead among media highlights. The day’s drop covered the bounce earlier in the week and more. In fact, the precious metal suffered its biggest single-day loss since December 1st, 2008. What’s more, unlike the Dow and crude, gold’s downdraft would push the market through meaningful support and open the market to three-month lows that find support scattered and at relatively weak levels below. Clearly, momentum and underlying sentiment trends are key in defining the commodity’s bearings from here on out. As one of the market’s favored dollar-hedges, gold would suffer from the currency’s climb to July highs. More invasive, however, was its role as a speculative asset. Fear over the credit stability of sovereign debt from countries like Greece, Spain and Portugal added fuel to a fundamental fire that was already smoldering beneath the market’s placid surface. On the other hand, the correlation between gold and underlying sentiment further suggests its role as a safe haven has been overwhelmed. At such dear prices, it is hard to justify the value in even this historical harbor from rough financial seas.

Spot Silver  -  $15.38 //  -$0.99 //  -6.06%

Just like gold, crude and equities; silver would suffer from the market-wide shift in the risk/reward equilibrium. However, as is common with this particular metal; declines for silver would ultimately outpace those for many of the other liquid assets. Part of the reason for this is the natural influence of margin and open interest behind the futures market. What’s more, this particular commodity lacks the safety aspect of gold and the mass of investor capital that finds its way to equities. Volume on today’s decline was much heavier than the previous days’ advances, suggesting the true trend lies to the downside.

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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