crude

Risk Appetite and Data Support Crudes Surge to New Highs Yet Conviction Does Not Hold

North American Commodity Update

Commodities – Energy

Risk Appetite and Data Support Crudes Surge to New Highs Yet Conviction Does Not Hold

Crude Oil (LS NYMEX) -  $81.85   //  $0.36  //  0.44%

Risk appetite, macro data and supply-and-demand statistics seemed to align for bullish crude traders. Yet despite begin given the fundamental green light (and notably still backed by impressive buying momentum over the past month), the active crude futures contract on the NYMEX was forced to retrace its morning thrust to a fresh, eight-week high just above $83. Whether using a fundamental, technical, sentiment or hedge-based trading approach, every active market participant is conscious of the $84 swing high set back on January 11th and its status as a 16-month high for the market. Surpassing this level could easily banish uncertainty and encourage sidelined investment; but truly extending a bull trend for this commodity will require a broad improvement in investor sentiment and a clear shift in production and consumption fundamentals. As for sentiment, the dollar was lower and equities were modestly higher; but it was obvious that the sparks of risk appetite are not catching. Whether a turn in the markets itself or a prominent economic catalyst is responsible for the inevitable restoration of speculative interest remains to be seen.

For actual drive, today’s fundamentals offered the better source of momentum – though this wouldn’t actually pan out as one would expect. Through the morning, the top headline was the report from China that its exports had surged 46 percent – suggesting global activity was accelerating and economies would require fuel to keep the expansion in place. During the European hours, there were two conflicting reports. Germany reported its crude reserves were 20 percent larger than initially estimated due to deposits reported in the Upper Rhine region. Counteracting this potential supply boost from Europe’s largest economy, OPEC raised its global consumption expectations for the year and upgraded its output projections by 190,000 barrels to 28.94 million barrels per day. Come the active US trading session, traders had hoped that the US Department of Energy inventory figures would be able to break the offsetting nature of the early data. Following the yesterday’s 6.5 million barrel increase from the API report, expectations were probably set higher for the DoE account than the 2.0 million rise expected. In fact, the 1.432 million barrel pickup through March 5th was smaller than expected; and there was a notable 3.181 million barrel and 2.796 million barrel contraction in gasoline and distillate inventories respectively. Furthermore, total fuel consumption rose 0.2 percent to an August high 19.7 million barrels. Nevertheless, with this weekly increase, we have see the longest period of expansion in crude holdings since May and the highest overall stockpiles at 353 million barrels since August.

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

Commodities – Metals

The Dollar Drops and Chinese Inflation Accelerates while Gold Tumbles

Spot Gold  -  $1,107.66   //  -$14.19 //  -1.26%

It seemed a dichotomy in nature. The US dollar was on the retreat and China reported remarkable levels of inflation; and yet, gold would tumble on the day. In fact, the commodity was little changed through most of the session; but there was a remarkable swing during the early trading hours of the US session that measured 2.7 percent in a mere two hours. This jump in activity notably pushed the market to lows not seen in over a week and ultimately broke a loose but untested rising channel for the past month.  For fundamental encouragement, the precious metal had a few contradictory dynamics to account for. Running astray of the commodity’s role as a dollar hedge, the decline in the US dollar through much of the day ultimately roused little impetus for price action. Furthermore, the currency’s penchant for playing safe haven seems to fit the assurances of former EU Commission President Prodi who suggested the Greece crisis had passed and other European economies would not follow in its path. However, there are two inconsistencies here. First, Prodi is no longer standing President; so he is entitled to black-and-white assessments; and gold itself has recently taken on a value of safe haven asset due to its value as an alternative to fiat currency with sovereign debt risk as inflated as it is. In the end, neither risk appetite nor credit stability were particularly strong; and long-standing concerns are still certainly engrained. Another questionable driver was China’s report of inflation. The government reported home prices grew at their fastest pace in nearly two years in recent data. This would seemingly support a demand for gold as an inflation hedge; but the implications this price growth has for an asset bubble and instability in the Chinese economy more than compensates for the bullish sentiment that can be derived from this data.

Spot Silver  -  $16.98   //  -$0.28  //  -1.62%

Just as surely as the dollar would retrace its gains yesterday, the currency would recover much of its losses today. In the end, this would leave highly-sensitive silver with a mute, dominant fundamental driver. From speculative readings, equities and other key markets were slowly building in favor of growth-linked performance. Nonetheless, this precious metal would take its cues from gold and close its worst daily performance in two weeks. Looking at speculative demand, iShares (the largest ETF backed by silver) reported its holdings were unchanged at 9,351 tons following two sales of 61 tons a piece over the past week.

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

crude

Crude Traders Unable to Exploit Technical Break as Risk Ways the Market Down

North American Commodity Update

Commodities – Energy

Crude Traders Unable to Exploit Technical Break as Risk Ways the Market Down

Crude Oil (LS NYMEX) –  $80.39  //  -$0.48 //  -0.59%

Without momentum to step in to support yesterday’s push above $80.50, the active light sweet crude futures contract on the NYMEX would ultimately be led to a corrective move. Therefore, while the commodity technically marked its highest close since January 11^th Wednesday, the market is still anchored to the congestion that has stalled progress for going on two weeks now. Undermining speculative efforts to carry crude to a new 16-month high are the dampening effects that stalled risk appetite has had across the capital markets. The same hesitation at the threshold of a new trend was seen in equities and EURUSD. The curb on sentiment is still a culmination of many different factors (including the struggles of an economic recovery, a withdrawal of government stimulus and uncertainty in sovereign debt risk); but risk aversion was leveraged today through a few notable events. The European Central Bank and Bank of England’s respective monetary policy decisions would offer little guidance on the difficult balance between growth and debt reduction. Both groups would maintain their benchmark rates and the BoE maintained its 200 pound bond purchasing program. However, the ECB would take another, measured move towards tightening with the announcement that it was switching to a variable rate on its three-month cash offers. Exacting a greater effect on sentiment, Greece finally decided to go forward with its necessary 5 billion euro bond sale after its spreads dropped following yesterday’s additional austerity cuts. With a bid of nearly three times what was offered, the market seemed confident in Greece’s ability to finance its debts. Nonetheless, calls for the EU to announce details on any aid package should the member economy need it from Finance Minister Papaconstantinou reflects the fine line this region is walking.

Going forward, it is very unlikely that oil will be able to decouple from its role as a speculative instrument. With global investors wary of adding to risky positions for fear of an unforeseen crisis, going long energy when global growth is still tame would be a risky step – especially at the market’s current highs. As for the ongoing adjustments to demand forecasts (through growth readings), the economic docket was light meaningful releases. Topping the list was the revision to the Euro Zone’s fourth quarter GDP figures. Whereas the headline figures for growth were unchanged at a 0.1 percent increase over the three-month period, household spending was notably upgraded to an unchanged figure. In other news, US factory orders rose by 1.7 percent in January and consumer spending – measured through the ICSC Chain Store Sales report – rose 2.7 percent. Tomorrow, the US non-farm payrolls could give the most meaningful adjustment to growth forecasts for the world’s largest economy that the market has seen in some time. Expectations are already set low with a forecast for 65,000 jobs lost and an uptick in the unemployment rate to 9.8 percent; but this speaks more to the slow recovery the economy has ahead of it rather than ushering in renewed fear of a secondary recession. From the supply side, the US Department of Energy inventory report for the week ending February 26^th yesterday recorded a 4.03 million barrel increase – extending the longest series of weekly increases since May and which pushed total inventories to its highest level since August. Alternatively, refineries increase their utilization rates to 81.9 percent – the highest level since October.

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

Commodities – Metals

Tempered Risk Appetite Draws Gold’s Controlled Rally to a Close

Spot Gold  -  $1,131.80  //  -$8.10  //  -0.71%

Spot gold fell for the first time in six days, ending the longest stretch of gains since early October. However, this pullback would ultimately come at the same pace the initial upswing was running. Quantifying the lack of momentum behind the metal’s recent bull trend, the CBOE’s Gold Volatility Index fell to a seven-week low of 20.06 percent. Notably, this activity levels just above the January and October lows that preceded forceful bearish and bullish waves respectively. This trend towards moderation comes from the soothed sense of financial uncertainty that peaked with the perceived Greek crisis. However, this is not to mean that risk trends have vanished for good while inflation and growth concerns step back in. Greece’s ability to fund its deficit is still questionable and a revival in market-wide fear could expose doubts about this region. Yet, even if this hot spot for investor anxiety were to fade, there is still a matter of ballooned global deficits and warnings surrounding sovereign credit ratings for even the largest economies. This raises the value of the metal as a safe haven when investors are looking for an alternative to devalued fiat currency. In the meantime, Friday’s US employment report could resuscitate gold bug’s focus on risk trends as this data weighs on investors’ confidence about the global recovery and further exacts its influence on the US dollar.

Spot Silver  -  $17.12   //  -$0.08  //  -0.44%

Like its more expensive counterpart, silver would end the day in the red. However, the pullback the metal would put in for was notably more controlled than the series of daily advances that preceded it. Lacking the clear function as a store of value that gold so blatantly exploits, this commodity is more sensitive to the whims of risk appetite and the actions of the US dollar. This could lend itself to leveraged volatility following the release of the often-unpredictable US NFPs.

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

crude

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.

crude

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

North American Commodity Update

Commodities – Energy

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

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

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

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

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

Commodities – Metals

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

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

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

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

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

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 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

crude

Oil Sees Extraordinary Levels of Volatility but Still Lacks Direction Despite DoE Inventory Report

North American Commodity Update

Commodities – Energy

Oil Sees Extraordinary Levels of Volatility but Still Lacks Direction Despite DoE Inventory Report

Crude Oil (LS NYMEX) -  $77.50  //  $0.27 //  0.35%

It was a battle of influence over oil’s bearing; but neither risk appetite nor the weekly US inventory figures leverage much pressure on the market either way. However, in the absence of a clear breakout and steady trend; there was certainly an excess of volatility with the active NYMEX futures contract frequently spanning the approximately $1 range the commodity has carved out a number of times through the European and US sessions. Establishing the primary, fundamental driver for oil; an assessment of price action today and over the past month suggests general investor sentiment still reigns over the influence that supply-and-demand fundamentals can muster. This does not come as a surprise considering that, despite the week-to-week changes in production and consumption of petrol products, there the existing gap is still extraordinary given the hold-over effects of the global recession and producers’ efforts to maintain revenues. In risk appetite, we see the impetus for the high volatility and non-directional price action in crude. This week’s bullish interests started to fade after European markets came online. London and New York stock trading was relatively choppy; but the asset class’s overall course was bearish. Yet until there is a clear break and trend established for equities, oil will likely struggle to establish direction.

In the meantime, the fundamentals behind the market would develop through a round of economic data and the weekly Department of Energy inventory figures. For a macro reading on demand, service sector activity surveys for the US, UK and Euro Zone provided a mixed view of health. The US ISM report notably edged to its highest level since May of 2008; but the reading was nonetheless weaker than expected. The Euro Zone figures were revised up from their initial reading, though they were still off December’s two-year high; while the United Kingdom’s figures eased to a five month low. The more direct driver for price action was the US stockpiles report for the week ending January 29th. The headline crude inventory reading reported a 2.317 million barrel increase through the week’s end which beat expectations of the 400,000 contraction forecasted and the 3.89 million barrel drop through the previous week. Anchoring the report however was the 1.306 million and 948,000 barrel slump in gasoline and distillates respectively. Looking at the other side of the market, gasoline demand in the four weeks ending January 29th fell 0.5 percent to 8.64 million barrels a day – the lowest level since 2004. Furthermore, in an effort to curb supply, refineries were operating at only 77.7 percent – the lowest rate of activity since at least 1989 when hurricanes haven’t specifically forced closures.

Commodities – Metals

Gold Develops a Broad Wedge as the Market Awaits a Clear Drive for Risk Trends

Spot Gold  -  $1,111.23   //  -$3.23 //  -0.29%

While silver and copper were deep in the red through Wednesday’s active US trading session; gold would maintain a sense of stability. With today’s pullback, the commodity has taken the next step towards developing a broad wedge formation that has roots going back to the record high set back in December. It won’t be long until gold bugs will be forced to decide a clear direction for the precious metal. But what will be the ultimate catalyst for this move? Most likely, risk appetite. Sentiment would take the lead on gold’s price action with the commodity’s price action resembling the same chop that developed with benchmark equity indexes. After having spent the early part of this week retracing the aggressive unwinding on high-yield positions through the second half of January, investors are now looking for a clear fundamental impetus to carry a meaningful trend. Today’s US ISM report and ADP payroll numbers couldn’t provide a firm footing for speculators. However, both indicators have bolstered the outlook for Friday’s non-farm payrolls release – a release that can single-handedly redefine the market sentiment. In the meantime, gold’s role as an inflation and dollar hedge will work with its speculative function to determine direction and volatility.

Spot Silver  -  $16.34 //  -$0.36 //  -2.18%

Though underlying risk appetite would establish little in the way of a clear direction through Wednesday’s session, silver saw an exceptionally sharp decline through the day. For drive, the metal was taking much of its momentum from the US dollar itself. The single currency (the primary means of pricing silver) put in for its first advance in three days. However, until the dollar index can overtake its seven-month high at 79.50 and gold slips below $1,075; the prospects for a bearish trend could be limited.

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

Crude Pushes to a New Monthly Low as Speculative Tides Recede, Inventory Figures Disappoint

North American Commodity Update

Commodities – Energy

Crude Pushes to a New Monthly Low as Speculative Tides Recede, Inventory Figures Disappoint

Crude Oil (LS NYMEX) -  $76.00  //  -$1.74 //  -2.24%

Speculators took another step towards truly reversing the buildup of risk appetite that defined most of 2009.  For crude, a clear move towards risk aversion spelled another sharp decline for the day – the seventh bearish close in the past eight days. Having dropped approximately 9.5 percent from its recent 15-month swing high, traders are now targeting the $75 level that defined both resistance and support over the past six months. Depending on how fundamentals develop going forward, this notable figure could fold under speculators’ efforts to unwind their risky positions or hold should sentiment stabilize. If today’s events are any guide for what to expect, the bearish scenario is the more likely outcome. Adding to China’s efforts to slow the market’s ascent by increasing limits on local lending (leverage), US President Barack Obama proposed regulations that would limit both the size and risk activities of the nation’s banks. These efforts to temper speculative interests are not just developing in China and the US; but considering these are two of the world’s largest financial markets, the impact is obvious. The fallout from the shift towards regulation is strangling speculation that was seeking capital gains. Considering such ‘traders’ were responsible for much of the rise to this point (and the fact that interest income and other forms of regular yield are still anemic), the implications are vast. Should the risk-sensitive Dow enter a bear trend, crude’s losses will only be amplified.

In the face of risk appetite, fundamentals could take much of the wind out of a potential bear trend or perhaps even completely prevent it – that is if the balance for supply-and-demand actually supported the market. Overnight, the fires of demand could have been stoked by the strong fourth quarter GDP report from China. However, the impressive 10.7 percent pace of expansion through 2009 was overshadowed by the recent warnings from policy makers that they would forcibly cool the economy. Perhaps next week’s US and UK growth figures will bolster the outlook for demand. Considering the World Bank yesterday upgraded its global and US GDP forecasts, this is not out of the question. On the other side of the physical market, supply measures offered little buffer to oil’s decline. The Department of Energy reported crude inventories in the week ending January 15th contracted 471,000 barrels. While this did offset forecasts for a 2.45 million barrel increase, it was still a relatively decline when holdings are so far above historical averages. What’s more, gasoline stockpiles ballooned 3.95 million barrels over the same period, suggesting refiners will need less of raw crude to process.

Commodities – Metals

Gold and Silver Follow Risk Aversion to a New Bear Trend

Spot Gold  -  $1,095.65   //  -$15.40 //  -1.39%

While there are different fundamental values in gold, it was clear that only one mattered today: speculative asset. The metal suffered its second consecutive decline – the worst back-to-back loss since early March – as many other risk-sensitive markets pitched lower. Thursday’s decline notably called an end to a rising trend of lows that stretches back to August and was developed on volume not seen since the commodity was ascending to its record highs back in November. Going forward, there is still a considerable level of capital interest priced into the precious metal. Having already retraced more 10 percent from the record highs set last month, those speculators that entered the market late will panic as their profits turn into losses. Eventually, gold may once again take up its role as a safe haven asset; but considering its high expense, that level may be much further down than many expect. Furthermore, the commodity’s relationship to the US dollar will only leverage bearish speculative winds as the currency is one of the favored safe havens. As for its role as an inflation hedge, the threat of price pressures born from cheap rates will take a back seat as growth struggles to establish a hearty pace and policy officials restrain credit and leverage.

Spot Silver  -  $17.46 //  -$0.41  //  -2.31%

Spurred on by trade unwinding and a surging dollar, silver plunged Thursday to push its two-day losses to nearly 8 percent. Should key speculative barometers like the Dow Jones Industrial Average and the US dollar enter the next phase of their respective reversals, the impact on silver will be pronounced. This commodity is already prone to incredible levels of volatility and the correlation between risk appetite and the primary pricing instrument for the metal leverages its fundamental response.

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 Stalls at $82, Metals Push Higher Ahead of Fed Minutes

Commodities – Energy

Crude Looks to Fed Minutes as Catalyst Ahead of Critical $82 Level

Crude Oil (WTI)        $81.82       +$0.50       +0.06%
Oil prices have paused ahead of major resistance below the $82 level, hinting that a double top may be in the works. Minutes from the last meeting of the US Federal Reserve headline the economic calendar, with traders looking for validation of the recent upgrade to the priced –in US yield outlook after December’s economic data took a decisive turn for the better. This stands to boost prices amid hopes of a speedier recovery for the world’s largest crude consumer, but a downward correction in the near-term may still be possible if traders perceive that their view of the US central bank’s time-table for raising rates has become rosier than is reasonable over recent weeks, with a downswing seeing initial support at $81.06.

Commodities – Metals

Gold Takes Out Key Resistance, Silver Tests Above $18

Gold       $1129.58       +$11.58       +1.04%
Gold prices looks to have taken out resistance at the top of a rising channel set from the lows in late December, with prices now aiming to challenge $1141.88. The metal retains a significant inverse correlation with the outlook for US monetary policy for the coming year (as expressed by the spread between Dec’2010 and Mar’2010 fed funds futures), so the release of the minutes from the last Federal Reserve meeting may prove to set off significant volatility.

Silver        $17.99       +$0.20       +1.12%
Silver prices have continued to soar, taking out support-turned-resistance at $17.79 and now targeting the $18.35 level. As with gold, a significant inverse correlation with the 2010 fed funds futures spread will mean that today’s Fed minutes release will be very closely watched.

crude

Oil May Retreat as Metals Extend Gains on Softer US Data

Commodities – Energy

Oil May Retrace Lower from Resistance at $82 on Home Sales Data

Crude Oil (WTI)       $81.43       -$0.08       -0.10%
Oil prices are testing major resistance at a potential double top ahead of the $82 level. The US economic docket offers mixed bag of catalysts. November’s Factory Orders are expected to have gained 0.5%, marking the third consecutive monthly increase (albeit the smallest one over the same period). Meanwhile, Pending Home Sales are set to drop -2.0%, the first decline since January 2009. On balance, this seems to be the more significant catalyst considering the US construction sector is the world’s single largest crude consumer, with lackluster sales hinting at slower building and pointing to a softer demand outlook. This may engineer a downward correction in the near-term, with initial support seen at $81.06.

Commodities – Metals

Gold, Silver May Extend Rebound on Softer US Data

Gold       $1121.40       +$0.20       +0.02%
Gold prices have pushed above falling trend line resistance set from early December. The way higher has been guided by a rising channel, with prices now squarely at resistance market by the formation’s upper boundary. The metal retains a significant inverse correlation with the outlook for US monetary policy for the coming year (as expressed by the spread between Dec’2010 and Mar’2010 fed funds futures), which means that a bullish breakout may be ahead as US Pending Home Sales decline. Such an outcome will see the next layer of resistance at $1141.88.

Silver       $17.58       +$0.01       +0.04%
Prices have broken above resistance at the upper boundary of a falling channel established from early December, exposing support-turned-resistance at $17.79. As with gold, a significant inverse correlation with the 2010 fed funds futures spread will mean that US Pending Home Sales figures offer the bulls the steam they need to push ahead in the near-term.

crude

Oil Poised to Advance, Metals Threatened on US ISM Data

Commodities – Energy

Oil to Extend Gains on US ISM, Cold Weather, Belarus Disruption

Crude Oil (WTI)       $80.62       +$1.26       +1.59%
Oil prices have continued to edge higher, tightly hugging the upper boundary of a broken rising channel set from December’s swing low below the $70 level. From here, the bulls look poised to test resistance in the $80.33 – $81.06 congestion region. Fundamental catalysts for further gains are plentiful. The Financial Times has reported that a spat between Russia and Belarus over oil prices has seen the former country stop crude shipments to its smaller neighbor. The FT has said that flows to Europe have been unaffected for now, but the total implications from the disruption remain unclear. Forecasts calling for below-average temperatures in the US are also supportive, boosting heating fuel demand in the world’s largest oil-consuming market. Finally, the outlook for US economic recovery looks to be firming as a Credit Suisse gauge tracking the market’s priced-in interest rate expectations rose to the highest since October to show traders now expect the US Federal Reserve to add 108 basis points to borrowing costs over the next 12 months. Offering further help in this regard, the US ISM Manufacturing PMI figure is set to rise to 54.1 in December, showing the industrial sector expanded at the fastest pace since April 2006.

Commodities – Metals

Gold, Silver Advance But US ISM Data May Stall Rebound

Gold       $1110.75       +$13.43       +1.22%
Gold have broken above the upper boundary of a falling channel that had guided prices lower for much of December. Near-term resistance lines up at $1114.45 from here. The metal retains a strong inverse correlation with the outlook for US monetary policy (as expressed by the spread between Dec’2010 and Mar’2010 fed funds futures), which hints that tomorrow’s release of December’s ISM figure may prove to be a hurdle for continued bullish momentum.

Silver       $17.14       +$0.25       +1.45%
Prices have extended a rebound from support at the bottom of a falling channel established earlier this month, moving back above the $17.00 handle. As with gold, a significant inverse correlation with the 2010 fed funds futures spread will mean that US ISM figures may check the bulls in the near-term.

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