Crude Snaps its Worst Bear Trend in 8 Years

North American Commodity Update

Commodities - Energy

Crude Snaps its Worst Bear Trend in 8 Years

Crude Oil (LS NYMEX) -  $70.82  //  $1.35 //  1.88%

Despite a heavy round of scheduled and unscheduled event risk, oil’s advance was more a reflection of exhausted speculative interest rather than true fundamentals. After nine consecutive daily losses (the worst trend since July of 2001), the commodity finally found relief from its selling pressure with a moderate advance back above the closely watched $70/barrel level. However, traders will wonder whether this was a potential trend reversal or merely a breather in a larger trend. The conviction on the market’s bearing for the past two months is unmistakable and supported by both fundamentals and risk trends. However, the momentum of the past two weeks is debatable.  A reconciliation between over-extended speculative interests and more earth-bound forecasts on supply-and-demand fundamentals has stood as a constant sentry over the market’s advance; but risk aversion is, so far, not a market-wide phenomenon. And, more often than not, trends that develop against the prevailing sense of sentiment in the broader markets are usually snuffed out.

Switching gears from market flows to fundamentals; there was a notable split in today’s event risk. Macro-economic data was offering a tentative support with the November reading of US industrial production at the forefront. This indicator was on its face a positive reading. A 0.8 percent increase in output last month not only supports growth projections for the world’s largest economy; but it more directly speaks to demand for energy from one of the world’s largest consumers of fuel. On the other hand, a historical look at this series of data shows considerable volatility from month to month; so trend of four months of expansion in this sector out of the past five is where we really find our fundamental bearings from this data. Looking ahead to tomorrow, the monthly Euro Zone manufacturing activity PIMI readings will offer a timely reading on expansion and consumption for another of the world’s largest energy consumers.  Later in the session, the US API inventory figures for the week through December 11 off a modest moderation of the previous week’s sharp reductions with a 924,000-barrel increase. At the same time, gasoline holdings jumped to 2.074 million barrels.  For market moving potential, Wednesday’s more market-moving Department of Energy forecast is still looking for a 2 million barrel contraction - an outlook that perhaps will change because of the industry report.

Commodities - Metals

Gold Torn between Dollar Gains and Inflation Pressures

Spot Gold  -  $1,125.20  //  -$1.50 //  -0.13%

Gold ended Tuesday’s session slightly lower; but the most aggressive move through the day was the bullish reversal that would retrace the morning’s bear wave and help stabilize a short-term floor around $1,110. For direction for the day, the three primary fundamental drivers were ultimately pointing the commodity in different directions. As a dollar hedge, the precious metal suffered for the dollar’s hearty advance through the Asian and European session. The dollar index was driven to a two-month high; which match the relative positioning of EURUSD – the currency market’s most liquid pairing. Considering the greenback’s status as a primary funding currency for the increasingly-popular carry trade; it wouldn’t be a stretch to assume the currency’s advance was a reflection of deteriorating risk appetite. In fact, other gauges for underlying sentiment held relatively stable throughout the session; and this anchor likely helped to stabilize to gold. The more direct fundamental offset to the dollar’s influence however can be attributed to the inflation data that crossed the wires in the morning London and New York sessions. The yellow metal is considered one of the most established, physical hedges to inflation; and history has certainly cemented this influence. The US producer price index for November accelerated to a 2.4 percent pace of annual growth – an aggressive return to inflation after 11 consecutive months of declines. From this angle, Wednesday’s CPI figures will likely hold a greater influence on overall inflation expectations and thereby gold.

Spot Silver  -  $17.42 //  $0.03 //  0.22%

Silver reported closed Tuesday with a second higher daily low, offering evidence that the market has tentatively turned from bear trend to temporary congestion. However, this influential trend has had a clear impact on market activity overall. Looking at the futures market, volume on the active silver contract has trended down to a nearly four-week low and open interest is at a 3-month low. Whereas gold has multiple fundamental functions (not to mention the appeal of very dear prices); silver appeal is largely speculative through its role as an ‘affordable alternative’ to the yellow metal.

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