crude oil

Crude Buffeted by Investor Worry, Chinese Growth Concerns

North American Commodity Update

Commodities – Energy

Crude Buffeted by Investor Worry, Chinese Growth Concerns

Crude Oil (LS NYMEX) -  $75.69  //  -$2.56   //  -3.27%

A cumulative drop in risk appetite and building concern over the future of growth would send the energy market tumbling through the European and US sessions Tuesday. For the US-based WTI crude futures contract, the day’s performance was particularly ugly. A 3.3 percent tumble on the day would pull the commodity back from a brief attempt at six-week highs. And, if there had not been a technical precedence set at $75.50/00, the highlights for performance could have turned out far worse. Nonetheless, the decline was the largest seen since June 4th and the rising trend channel beginning with the late May reversal was subsequently broken in the process. It wouldn’t be difficult to whip up a follow through bearish session and mark a critical reversal given the proper circumstances. However, as it stands, the CBOE’s Oil Volatility Index is still well of its highs from May and June (at 39.2 percent); while aggregate volume on NYMEX crude futures dropped to its lowest level since January 7th (375,000 contracts) through yesterday and the one-week average on open interest slipped to a similar, historic low (at 1.261 million contract). Together, these conditions suggest traders are holding back from major trend development.

On the other hand, volatility and bearish conviction may not be difficult to provoke going forward given the correct circumstances. Today’s fundamental backdrop was defined by a severe drop in speculative confidence and discouraging economic data. For traders, risk appetite was probably the greatest offender. In the early hours, concern was stoked by news that an indicator that is used to forecast economic growth in China was revised much lower than was previously stated. This leveraged persistent concerns that the best performing economy (and the emerging market it represents) would undermine the economic recovery and subsequently financial stability. This news aside, however, the true concern would develop around the European Union and the financial trouble the region faces over the coming 48 hours when the a critical, long-term ECB lending facility expires and forces banks to show their hand when they reveal how much debt must be rolled over. This could turn into another catalyst towards jumpstarting a true financial crisis; but it all depends on the results of the facility and the market’s reaction.

While there was a financial and risk-based interest in the downgrade in the data used to forecast Chinese growth; this development further undermined the energy market as the country is the second biggest energy consumer in the world. Should demand wane in China, it will certainly dent the gap between supply and consumption. Adding to these fundamental concerns we were also presented with a discouraging turn for Japanese unemployment and industrial production; while the US marked a surprisingly sharp drop in consumer confidence. This is front-line demand from the third and first largest crude users in the world. From demand to supply updates, Tropical Storm Alex is expected to accelerate to a Hurricane in the Gulf of Mexico; but landfall near the Mexico/Texas boarder is expected to miss production areas. For a modest bullish tinge on the day, the API crude oil inventory report for the week ending June 25th contracted 3.4 million barrels. This sets a positive precedence for tomorrow’s DoE report.

Commodities – Metals

Gold Staves off Another Attempt at a Bearish Reversal as European Financial Clock Ticks Down

Spot Gold -  $1,240.65   //   $1.70   //   0.14%

It is somewhat surprising that gold would not perform better today than what the commodity would put in for. Given its function as a safe haven asset that represents a harbor from currency volatility and the reverberating effects of sovereign credit risk, a direct fundamental link would suggest the precious metal would have responded dramatically to the sharp drop in risk appetite across the markets Tuesday. A normal swing in the capital markets based on investor sentiment alone would not likely produce a one-for-one rally for gold. What is needed is a clear increase in fear linked to the normal performance of the credit and financial markets. In essence, that is what we saw today. At the root of today’s 3.1 percent plunge in the S&P 500 and 3.3 percent drop in WTI crude was concern over the health of the European financial markets in the coming days. The clock is ticking for the July 1st expiration of the 12-month Long-Term Refinancing Operation facility that the ECB implemented a year ago to ensure liquidity to the banking system. This will require banks to pay back 442 billion euros to the central bank in a relatively strained period for the markets. Naturally, this could leave banks’ coffers empty; and they can either live with anemic reserves or roll forward to the three-month facility that will be opened tomorrow. Should demand for temporary funds prove extraordinary, fear that the region is barely holding it together could trigger a panic. Another concern based in Europe is the outcome of the EU stress tests. Today, three major German banks were reported to have received a clean bill of health through the financial simulation according to unnamed sources. Yet, Germany is the largest and best positioned of the region’s banks; so troubles can develop for more strategically important members like Spain.

Looking at activity levels behind the precious metal, the CBOE Gold Volatility Index rose moderately on the day (to 24.07 percent); but the increase was nowhere near the intensity that we had seen back on May 6th and 20th. Clearly, there is hesitancy in the face of the financial uncertainties in the days to come. From the futures market, net volume is still well off the levels seen this through May. On the other hand, open interest is still just off record highs (at 600,000 contracts). This level of interest vested against weak activity suggests the concept that this asset could be overpriced is starting to seep in. As it stands, the spot market is testing a long-term rising trendline; and now a general level of support around $1,225 marks the line in the sand for a stable bullish position.

Spot Silver  -  $18.49   //  -$0.28   //   -1.47%

It wasn’t difficult to ascertain which side of the market silver was tilted towards. Rather than siding with gold (which was more congestion based as it followed its fundamental guidelines), the more affordable precious metal took its cues from the traditional risk-based capital markets. Putting in for the first back-to-back decline since June 3rd and 4th, silver is still contained to a general pace of congestion with a longer-term bullish bias.

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

crude oil

Negative Investor Sentiment, Mixed Data Leads Crude to Close its Monday Open Gap

North American Commodity Update

Commodities – Energy

Negative Investor Sentiment, Mixed Data Leads Crude to Close its Monday Open Gap

Crude Oil (LS NYMEX) -  $77.21  //  -$0.61   //  -0.78%

Looking much like the intraday bearish reversal from Monday, the US benchmark crude futures contract (the NYMEX-based WTI) put in for a close in the red through the end of the New York floor session. This move has pushed crude to fully close the gap that opened the week and drove the commodity to a one-month high. This lack of commitment is partially attributable to the failed attempt to catalyze investor confidence on the news that Chinese officials had moved away from the yuan’s peg to the US dollar and would allow the exchange rate to adjust within limits. Today, the yuan put in for its largest daily decline since December of 2008; and a 1.6 percent drop from the S&P 500 portrayed a return to skepticism amongst investors. Further curbing the appetite for yield (and the risk that comes with it), both Japan and the United Kingdom issued significant budget updates. Though ambitious goals have been laid out to rein in record fiscal deficits and improve the financial standings of the major industrialized economies, the implications for economic activity (and thereby energy demand) are negative. Further depressing speculative interests, a renewed focus on the stability and health of private European banks is pulling traders back to one of the sore spots in global finance.

Turning the focus back on tangible fundamental, the economic docket would have its ups and downs for expected output and demand. During Europe trading hours, the commodity was offered a boost when the German IFO business sentiment survey for June reported confidence was at its highest level since May of 2008. This improvement was the responsibility of the current conditions component of the survey, while the expectations figure actually slipped a second month. Such a divergence could lead to plans to cull activity and thereby trim energy needs. With the US session, the economic data was uniformly discouraging for oil. Existing home sales for the month of May unexpectedly fell 2.2 percent. Then, later in the day, the API crude inventory report for the week ending June 18th marked a 3.685 million barrel increase in stockpiles. Looking ahead to tomorrow, the DoE equivalent is expected to print a 800,000-barrel drop in holdings; but the lack of response with previous releases sets the bar low on this particular event.

For futures traders, today was the last trading day of the July 2010 WTI futures contract, leading the market to roll out to the August contract. Notably, open interest on this new front month reached a record and volume was just off a yesterday’s high (219,929 contract turnover); but aggregate net interest and volume are still excessively low. In fact, overall open interest is at its lowest level (at 1.272 million contracts) since February 22nd.  Furthermore, the CBOE Oil Volatility index is still well off its highs from a month ago (at 35.5 percent); and the premium between the active nearby and the two-year deferred futures contract has widened modestly to $7.55.

Commodities – Metals

Uncertainty on the Yuan, European Finances Stabilizes Gold

Spot Gold -  $1,239.65   //   $5.95   //   0.48%

Just as quickly as a surprise decoupling of the yuan from the dollar can stoke fantasies that China is performing better than expected and the global recovery will be more balanced, reality comes crashing back to balance out the long-term troubles facing the global financial market. With the high hopes over the Chinese shift from a fixed exchange rate regime to managed float having passed, traders are once again falling back on the here-and-now. The markets would have a very interesting mix of macroeconomic data and fiscal stability updates to work with – exactly what the precious metal uses to derive fundamental activity. For economic health, the modest improvements in business sentiment in Germany and consumer confidence for the broader Eurozone was offset by the weak performance of the US housing market.

The real market-moving announcements were related to the fiscal and financial health of the larger economic regions. In the Asian session, Japanese Prime Minister Naoto Kan projected a balanced budget by 2021 with an effort to cap annual spending to 71 trillion yen over the coming three years. Both Standard & Poor’s and Fitch maintained a sense of skepticism however in anticipation of details as to how this ambitious target would be met.  Later in the European session, anticipation was high for the United Kingdom’s own budget announcement. The tax hike, bank levy and cut to welfare spending were expected to translate into a significant reduction in spending; but ratings agencies have yet to assess whether this is enough to prevent a downgrade for the nation later down the line. With little hint of a positive spin, the focus in European trading hours would also turn to regional banks. ECB board member Noyer  suggested some banks are facing funding problems as confidence deteriorates. Alternatively, in his own testimony to the TARP Oversight Panel, Treasury Secretary Timothy Geithner said that credit was thawing in the United States and would contribute to growth going forward.

Looking at futures activity, the active August COMEX contract reported a dip in activity commensurate to the tame turn in underlying price action. That being said open interest for the contract rose to a new high through yesterday at 371,000 contracts. Further delayed aggregate volume figures are significantly lower than the late May levels while net interest has risen to a new record high of 603,000 contracts. It is also worth making note of the general decline in the premium difference between the August 2010 contract and the August 2012 counterpart (now at $33.60) since last June’s high of $53.20. This potential points to tempered interest in the commodity going forward.

Spot Silver  -  $18.80   //  $0.07   //   0.37%

There was relatively little volatility behind silver trading Tuesday after two days of excessive price action. Volatility was generally dampened by the mute pace of speculative activity behind the speculative crowd; but direction would further be discouraged by a stalled gold market and the third daily advance for the dollar (not to mention the slip in risk appetite that no doubt helped to bolster the currency). Looking at the futures market, the active July 2010 COMEX contract has seen volume cool from the spikes seen on negative price action days. Open interest on the contract has steadily decline since mid-May. On the other hand aggregate open interest has slowly climbed to highs not seen since November as investors look for potential exposure to gold and the expected economic recovery without having to pay the premium.

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

crude oil

Crude Squanders Early Rally on News China Had Dropped its Peg

North American Commodity Update

Commodities – Energy

Crude Squanders Early Rally on News China Had Dropped its Peg

Crude Oil (LS NYMEX) -  $77.32  //  $0.14   //  0.18%

The big news on the morning – that China had ended a two-year stint fixed rate regime – would not go unnoticed by oil traders. From a speculative perspective, this announcement was interpreted as a sign that capital markets should roar ahead; and for the fundamentally inclined, the news could be understood to mean the global economy would be able to put in for a more balanced economic economy. Yet, neither of these considerations would ultimately result in a lasting bullish assistance for the commodity. Following the opening gap for the futures market, the active NYMEX crude contract was spurred on to its biggest advance in six weeks before it ultimately all of the active session gains. It should be noted that tomorrow is the last trading day for the July 2010 crude contract. That being said, aggregate volume for the market dropped to its lowest level since March 30th (459,259  contracts) this past Friday as open interest plunged to its lowest level since March 1st (1.283 million contracts).

Looking at the fundamental activity through the session, there was very little on the economic docket through the opening 24 hours of the trading week. That wouldn’t end up being a problem for volatility development given the response to the People’s Bank of China’s announcement that the country was abandoning its fixed exchange rate regime against the benchmark dollar. The implications for this development are potentially remarkable; but much of it is simply speculative at this point. For those using crude as an trading asset, China’s liberal turn would seem a sign that the globe’s top investment destination is performing better than many had thought. Furthermore, this move could balance political tensions ahead of this weekend’s G20 with those officials claiming China was holding its currency artificially low in orders to stoke exports. However, from a supply-and-demand perspective, a move from a fixed exchange rate to a closely managed regime gives the impression that the world’s recovery will be better balanced with some industrialized nations finding themselves on a more competitive footing while the world’s second largest economy boosts its own consumption habits. Yet, these after effects will come much later; and the controlled nature of the FX policy will not allow for dramatic changes when they are needed the most.

Looking ahead to tomorrow, there will no doubt be echoes from the China announcement; but fundamental interests will be able to tune back into the calendar for defined macroeconomic events.  The German IFO business confidence survey will be particularly important for energy traders; but US existing home sales and Euro Zone consumer confidence will be worth analyzing for growth expectations. At least, with the difference between the active NYMEX futures contract and the two-year deferred contracting to $7.78, we can see through the immediate volatility of today’s session an improvement in the market’s outlook.

Commodities – Metals

Failed Follow Through Followed by Sharp Tumble as Gold Suffers from Improved Sentiment then Dollar Strength

Spot Gold -  $1,233.50   //   -$23.30   //   -1.85%

Just one trading day after gold put in for a dramatic technical breakout to a new record high, the metal has entered into a deep retracement. The spot market put in for its worst daily decline in just over a month Monday, dramatically changing the outlook for the market. Typically, after a meaningful break from congestion (and this was meaningful after developing a month-and-a-half long ascending triangle pattern), a fresh wave of investors are attracted to the market as the commodity makes headlines. Yet, it seems gold may have already saturated investors’ awareness and the sheer cost of the asset is leading to second thoughts.

For fundamental inspiration, the Chinese news was a particularly interesting announcement. Given gold traders’ preoccupation with sovereign credit risks, this particular headline would have a unique interpretation. What does a switch from a fixed exchange policy to a managed one mean for sovereign risks globally? This is a move that will ease global tensions arising from the call of currency manipulation which could further protectionist agendas that would further hurt international capital flow. What’s more, such a move is a sign that the world’s second largest economy is strong enough to take a step that could potentially invite greater volatility into the economy. This helps to offset building concern that China may be on pace to suffer a credit market collapse due to the overheated lending activities of the previous years – if only to distract from this very real problem for a short time. And, later in the US session when the speculative good will of the Chinese announcement was run through, the selling effort behind gold wouldn’t let up thanks to an impressive recovery for the US dollar – the primary alternative as its own safe haven.

It is interesting to note that open interest on the COMEX futures contract rose to an all-time high this past week. Yet, with today’s price action, it is interesting to note that the most active contract (the August 2010 expiry) would not see a particularly dramatic increase in volume. Furthermore, the CBOE Gold Volatility Index was little moved despite the significant drop in underlying price action.

Spot Silver  -  $18.75   //  -$0.43   //  -2.24%

Silver’s efforts were limited at the get go. On the open of electronic trading, metal traders were encouraged by China’s news that policy officials had shifted tack on the currency exchange rate. The bolster this news offered investor sentiment was undeniable; but silver’s correlation to these moves would be muted by its links to gold. By the afternoon of the US session when risk appetite was on the retreat, the speculative commodity would find another negative drive in the former of the US dollar. That being said, volume on the active COMEX futures contract rose to a two week high as aggregate open interest sustained its march higher through the end of last week.

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

crude oil

Risk Appetite Finds Conviction, Drives Crude to a One-Month High

North American Commodity Update

Commodities – Energy

Risk Appetite Finds Conviction, Drives Crude to a One-Month High

Crude Oil (LS NYMEX) -  $75.80  //  $1.42   //  1.91%

Risk appetite accelerated through Thursday’s active trading sessions; and naturally, the speculative appeal of crude would lead to impressive gains up through the active US session. Taking stock of the commodity’s performance on the day, the active NYMEX futures contract climbed for a fourth consecutive day. Interestingly enough, we haven’t seen such a consistent performance since the end of April just before the market collapsed 26 percent. Drawing a direct contrast between this week’s rally and the ‘last gasp’ move in April is something of a stretch. Both would come after a period of congestion and would set new relative highs; but the speculative burden on the market is currently much lower than it was two months ago. Furthermore, the threat of other capital markets triggering a cascade of sell orders is much lower now than it was back then. For comparison, the Dow Jones Industrial Average climbed nearly 3 percent through exchange hours and subsequently overtook the psychologically important 10,000 level. Furthermore, the barometer for fundamental concern in the FX market (EURUSD) has climbed back up to its historical midpoint – a level which was breeched this past Friday and generated significant bearish concern.

Feeding a general strength in risk appetite through Thursday’s session were a number of key economic indicators and events that would leverage the a nascent reversal in speculative interests. At the forefront of every trader’s mind is the possibility of a global financial crisis developing in the coming months. This treat of this happening was significantly diminished with the ECB’s monetary policy meeting. The focus of disaster theorists the world over, the Eurozone has become the epicenter for all financial ripples through the system. However, far from worries that Greece is on the verge of default; ECB President Trichet announced that the policy authority would continue to support the region’s members and its collective money markets by vowing to continue his purchase of government bonds while simultaneously announcing three unlimited lending facilities to banks (one in July, August and September). What’s more, the European Union would build on the optimism that was established with the ECB’s support when the group’s President suggested they would further expand the 750 billion euro financial rescue plan that had been passed should it seem the original size would not be sufficient. From speculative interest to true supply/demand considerations, Japan’s economy grew faster than expected in its final 1Q GDP reading. The world’s second largest economy grew at its fastest pace in a decade when adjusted for inflation. What’s more, China would confirm the strength of May data, thought the actual levels would fall somewhat short of the optimistic figures suggested yesterday.

Turning to the futures market to assess the quality of oil’s rally; the CBOE volatility gauge finally broke the trend of a steady rise in risk premiums that has been in place since late April. The measure – used to gauge the potential change in prices over the coming 30 days – slipped to 39 percent. Alternatively, the volume on the active futures contract extended its steady decline through the US session despite the market’s momentum and the new, near-month high through the day. Nonetheless, the price premium for the July 2012 over the current contract slipped to $8.73 from $9.81 yesterday and the supply-side concern with the US-based WTI contract is fully reversed with the active Brent crude contract trading at a $0.20 to its US counterpart – the biggest positive gap in two months.

Commodities – Metals

Gold Advances as Fear Over a European Financial Crisis and Chinese Market Collapse Further Recede

Spot Gold -  $1,217.06   //   -$16.44   //   -1.33%

Slipping for a third consecutive day from the intraday record high set this past Tuesday, gold is slowly bleeding some of the premium it had built up as a safe haven and alternative store of wealth. The influence from risk appetite was obvious. Growth-linked securities surged through the day with a particularly strong performance from the Dow Jones Industrial Average (which would close well over the 10,000 hurdle) and commodity currencies (which rallied well over two percent against a range of counterparts). However, this precious metal is not the traditional safe haven in the risk spectrum. Rather, gold is considered the primary harbor for capital looking to avoid the ravages to the financial system that could be caused by sovereign downgrades and default. On this front, we would see a market improvement in the speculative weather. The most remarkable upturn would come through the collective effort of European policy officials. ECB President Trichet offered open ended support for the region’s markets and economies with a vow to continue purchasing government debt and the announcement of three additional liquidity facilities over the coming months. These seems a direct answer to the record levels of overnight deposits that have found their way onto the central bank’s books and the financing troubles that some EU members have found themselves in. Another crisis seemingly averted (though in reality it has just been deferred) was the worry that Chinese markets were on the verge of collapsing under their own weight. The confirmation of May’s economic data gives enough fundamental support for the premium build up to buy doubt that it is not sustainable. Volume and open interest are still exceedingly low (which they have been through this most recent effort to forge new highs). This could present a shift in interest to the physical side; but costs and extended ETF holdings suggest the transition is not likely that dramatic.

Spot Silver  -  $18.22   //  $0.08   //  0.44%

Despite the impressive rally from risk-related assets and the subsequent tumble in the US dollar, silver’s performance today was somewhat remarkable. Volatility was greater than the previous two days; but its performance would not offer a clear direction. Though a speculative asset at its heart, there is no doubt interest behind this metal that was established as a cheaper alternative to pricy gold as a safe haven asset class. If this dichotomous alliance holds, expect congestion to persist.

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

crude oil

Oil Traders Hesitant in Showing Confidence after Hungary Backtrack

North American Commodity Update

Commodities – Energy

Oil Traders Hesitant in Showing Confidence after Hungary Backtrack

Crude Oil (LS NYMEX) -  $71.12  //  -$0.39   //  -0.55%

Risk appetite and confidence in the performance of the global economic remained depressed through Monday’s session despite efforts to revive investor sentiment. For crude – which relies on forecasts for consumption trends as well as speculative interests – the deflated state would keep the active nearby contract on the NYMEX near an eight-month range low while the market’s volatility reading hovered just below an 11-month high 49 percent set just two weeks ago. Bulls were looking to the change in tack by Hungarian officials – recanting warnings last week that the economy was on the verge of default – to immediately revive confidence. However, this reversal would leave market participants skeptical over the European region’s economic and financial health especially when it comes to reinterpreting the overly-optimistic take that policy officials voice. What does financial trouble for Hungary mean to energy traders? A default for this periphery European Union member could lead to significant losses for neighboring nation’s which had invested in the nation’s debt; and more critically it could dramatically depress confidence in the European region in general. This could lead to a full-blown financial crisis for the region or even the world and thereby curb speculative interest in risky assets like crude. Furthermore, with financial health on the decline, growth would almost certainly be undermined, further stalling a necessary balancing of supply and demand factors for the market.

Returning a modest level of optimism to the commodity through the day were a few macroeconomic indicators on the European and US dockets. During European trading hours, two indicators of note boosted confidence and demand expectations: German factory orders and the Sentix Eurozone Investor Confidence survey. The April orders number would unexpectedly grow 2.8 percent, leading the yearly figure to expand at its fastest pace on record (29.6 percent). This is a critical measure of economic activity for Europe’s largest economy. Offering a different view, the Sentix confidence report for June unexpectedly recovered from its worst tumble in two years, though the measure would still reflect net pessimism for the 23rd time in 24 months. This is a promising turn given the very severe concern surrounding Europe’s financial future. Another booster for growth, and thereby demand, forecasts came from the US consumer credit report for April. Unexpectedly rising $1 billion, this report suggests that consumer spending is on pace to recover and lending conditions are improving – both critical steps towards robust expansion for the world’s largest economy.

Taking a different approach to the futures market, there are a few things to note about recent price action. The first is the lack of response to Friday’s plunge. While price action was quite substantial this past Friday in response to the Hungary news and its speculative fallout, both volume and open interest on the benchmark NYMEX contract were relatively unchanged. That suggests a lack of follow through on the news. Another interest note is that the spread between the active WTI contract traded in the US and the Brent contract standard in the UK is once again widening (and now at $0.89). Finally, contango in US oil markets partly in response to the Gulf of Mexico oil spill and its expected impact on regulations expected to be adopted in its wake. The difference between the active contract and that eight years forward is a remarkable $22 per barrel.

Commodities – Metals

Euro’s Persistent Tumble Sends Investors to Gold as Safety Sought Outside Currencies, Government Debt

Spot Gold -  $1,241.35  //  $21.45  //  1.76%

Just when it seemed investor sentiment has stabilized, gold has surged ahead. Spot trading record its biggest one-day rally in nearly a month, bringing the market dangerously close the record highs set back in the middle of May. Interestingly enough, the CFTC’s Commitment of Traders survey reported net speculative long positions actually fell by 1 percent to 224,546 contracts on the Comex in the week through June 1st. In reality, this is a modest slip given the proximity of open interest to the record high set this past October. However, today’s upsurge would not originate from positioning news. Strength was instead found on the need for safety and an alternative to the traditional ‘risk-free’ assets. This may seem an unusual development given Hungary’s reversal on its default warning from Friday; but in truth, confidence in policy officials’ commentary has diminished remarkably in recent months. Last week’s warning stands as a remarkable episode of candidness that will not be soon forgot by investors that are skeptical of the future. Furthermore, the fact that the euro was unable to make up lost ground against the benchmark US dollar on this news confirms investors’ position and stokes demand for an asset that can avoid the most severe financial ripples that would result in a global crisis. Further adding to the impression of uncertainty, German Chancellor Merkel announced 80 billion euros in budget cuts over four years, lending liquidity in China further dried up according to seven-day repo rates and Spain prepared for another strike tomorrow. It wouldn’t take much for spot gold to set a new record high in the near future.

Spot Silver  -  $18.19   //  $0.74  //  4.24%

The first advance in five trading sessions has led spot silver to more than recover the ground lost Friday after equities collapsed. The fundamental spark for this metal was not hard to spot. Considering risk appetite was slipping alongside traditional speculative markets like equities (the S&P 500 fell 1.4 percent), silver traders were taking direction and intensity cues from gold. Interestingly enough, other members of the precious metal group were looking at modest gains of their own while industrials fell substantially. This may reflect a rise in demand for a safe haven on the level of gold but well below its exorbitant cost.

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

crude oil

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

North American Commodity Update

Commodities – Energy

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

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

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

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

Commodities – Metals

Best Back to Back Rally for Gold in Months as Sentiment and North Korea Tension Send Capital to Safe Haven

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

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

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

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

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

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

North American Commodity Update

Commodities – Energy

Speculative Interests Settle after the EU’s Bailout, Crude Eyes $75

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

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

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

Commodities – Metals

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

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

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

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

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

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

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

North American Commodity Update

Commodities – Energy

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

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

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

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

Commodities – Metals

Dollar’s Strength Offsets Risk Wavering for Fundamental Gold Traders

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

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

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

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

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

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

crude oil

Are Commodities Set to Once Again Take Off?

It appears that commodities, a highly regarded asset class for 2009, have disappointed investors thus far in 2010.  Gold remains well off its torrid 2009 pace where the yellow metal eclipsed the $1200 mark, while crude oil was caught in the $70-$80 range for most of the year’s first quarter.  In the past few weeks, however, oil has rallied as high as $87 a barrel, a level not breached since 2008, and has found comfortable support at the $80 level.  Gold, on the other hand, has found strong support above $1120 an ounce and eclipsed $1160 in recent weeks.  Is this a signal that commodities are set to once again take off, or is this a last gasp for the bulls before bearish sentiment returns?

When evaluating movement in the commodity markets, it is important to dissect the fundamental indicators that may drive the nominal price of these assets.  For crude oil, global industrial demand is an obvious fundamental driver of price and was often cited as the reason for rising oil prices over the last decade.  Many analysts believe that strong growth in emerging markets, such as China, India, and Brazil has been pumping up demand for the world’s limited supply of natural resources.  Another factor at play, especially in the recent oil rally beginning in March 2009, has been fundamental weakness in paper currencies due to quantitative easing from central banks around the world and an explosion in government debt.  Since both oil and gold are traded mostly in U.S. dollar terms, the strength or weakness of the greenback can have as big an impact on the price as industrial supply and demand factors.  The market’s general view of paper currencies is especially evident in the price of gold, which historically has a uniquely high negative correlation with the U.S. dollar and in itself has very little industrial use.

Thus far in 2010, there has been a major reversal in sentiment towards the U.S. Dollar in comparison to other currencies.  In the first three months of the year, the Dollar gained 4%- posting a strong rally against the euro and sterling amid concerns over fiscal issues abroad.  While a dollar rally would generally reflect confidence in the U.S. currency, the greenback’s current stature may be more attributable to weakness in Europe than stronger fundamentals in the U.S.  Alarming budget deficits in Greece, Portugal, and Ireland have greatly deteriorated confidence in the euro-zone and have raised questions regarding the currency union’s sustainability long-term.  Although a recent bailout package for Greece has alleviated short-term concerns, questions remain over a longer time horizon which bodes well for the dollar.  Despite the recent greenback strength and possibility of continuance, commodities have held steady and in the past few weeks have begun to break out to the upside.  Oil sits 9% higher for the year thanks to a recent rally in the last week, while gold is up nearly 2 percent for the year.  The gold story going forward may be the most telling of our current situation and provide evidence that the dollar “strength” is not really strength at all.

With instability in the financial markets and broader economy, ballooning public debts, and high unemployment, it appears that government policy makers and central bankers will find it preferable to continue the easy money policies and big spending that have characterized the last two years.  However, due to great distress in government balance sheets, loose monetary policy through low interest rates may be the only tool available to ward off high unemployment and weak consumer spending.  Such low interest rate policy measures would remain a disincentive to savers, causing increased speculation and yield seeking through both paper and hard assets.  Overall, commodities appear to be a strong bet going forward, especially in a continued low-rate environment.

U.S. Dollar Index Chart (Daily)

Crude Oil Chart (Daily)

Gold Chart (Daily)

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

crude oil

Oil Maintains its Bearing, Loses Momentum

North American Commodity Update

Commodities – Energy

Oil Maintains its Bearing, Loses Momentum

Crude Oil (LS NYMEX) -  $86.820 //  $0.20 //  0.23%

It is an inevitability of all breakouts. Eventually, momentum will fade and a new or renewed trend will either settle or reverse. For crude, the aggressive rally over the past week was finally met with a day of rest. In fact, Tuesday’s advance was the smallest since the commodity engaged its upswing. Nonetheless, the day’s bullish close marked the sixth consecutive daily advance to yet another 17-month high. This puts the market’s health into perspective. However, establishing the probabilities that crude’s climb will proceed unfettered is a little trickier. Leveraging a speculative weight on the energy market today, other growth-sensitive capital asset classes reported a notable pullback in risk appetite. This was most obvious in the Dow Jones Industrial Average’s inability to overtake the psychologically-fortified 11,000 figure and the safe-haven dollar’s ability to put in for an advance through the session. The speculative bid was quieted with the return of economic liquidity just as concern over Greece’s financial health and the viability of its EU / IMF contingency plan was revived. Naturally, the tempered investor optimism would weigh on crude; but the subsequent strength this turn afforded the US dollar (the benchmark pricing instrument for the Light Sweet crude traded in the United States) would further curb the commodities attempts at appreciation.

Despite the diminished enthusiasm amongst the speculative crowd, demand-and-supply fundamentals have notably improved over recent weeks. This past week’s remarkable improvement in global manufacturing activity and the remarkable increase in US payrolls have helped to spread the notion that the world’s economy is already in the developmental stage of the recovery (the most volatile and malleable). From the macroeconomic picture today, a few economic indicators would further bolster the case of a strong return to growth. In Japan, the leading economic indicators report grew for a 12th consecutive month in a sign that expansion for the world’s second largest economy would contribute to the closing the production/consumption gap. Other secondary readings to support the growth cause included; an RBA hike based on above trend growth forecasts; a notable advance in UK construction activity and the first positive reading from European investors in 22 months. However, there is still a long way to go before early signs of growth actually translates into progress for working down the supply glut. Reminding us that the there is still an imbalance in the energy complex, the API reported a 1.07 million barrel increase in crude oil inventories through last week. This sets the tone for tomorrow’s more closely watched Department of Energy stockpile report, where the government is expected to report the ninth consecutive increase in oil holdings.

Commodities – Metals

Concerns Over Greece, Unchecked Inflation Push Gold to New Monthly Highs

Spot Gold -  $1,134.30   //  $2.40  //  0.21%

Curbed risk appetite would certainly hold gold back Tuesday; but other fundamental variables would ensure the metal would advance on the session, extend a notable rising trend channel and push the spot to its highest level in a month. Having surpassed $1,130, gold bugs have found a little more freedom in carrying the market on capital gains expectations. However, there was certainly a fundamental component to gold’s advance as well. The most influential driver was the fear generated in an unsubstantiated report that Greece would not tap the IMF for loans should the government be unable to meet its debts; because the rates charged by the international bank would be far too expensive. While this would make little sense on the Greek government’s part because it is well-known that Germany (among others) would not have agreed to a coordinated relief effort unless the IMF was involved. Therefore, excluding this source of financial aid would likely preclude support altogether. Regardless of whether these concerns held water or not, their impact on Greek yields was incontrovertible. The yield on the benchmark 10-year note rose above 7 percent for the first time since January. Naturally, this revived concern over the health of the European Union and the region’s currency. And, while the dollar would benefit from this uncertainty (and subsequently work against gold as the metal is one of the greenback’s favored hedges), gold’s independence of the fiat asset class would add an additional level of safety. In addition to the EU concerns today, the UK Prime Minister would stoke uncertainty by finally setting the national election for May 6th (a stability concern), while the Federal Open Market Committee’s policy minutes contained a warning about moving too early on interest rates (bolstering the inflation outlook and weighing the dollar).

Spot Silver  -  $17.93   //  -$0.15  //  -0.83%

In dollar terms, silver finds most of its fundamental function as an alternative to the currency and as a risky asset that stands on the opposite side of the greenback. However, looking at the performance of the commodity against other fiat measures, there is clearly a level of demand that can be established through the safety appeal as silver correlates to its more expensive counterpart (gold). In euro terms, silver advanced today to its highest level since March of 2008, while the commodity hit a record high when measured in pounds.

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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