commodities

Is Crude’s Rally a Factor of Market Flows, Fundamentals or Technicals?

Despite the inconsistency in liquidity, crude oil has rallied for eight consecutive sessions to test October’s swing high (though not overtaking it) and subsequently mark its highest close in 14-months. There is a considerable round of fundamentals, technicals and unusual market conditions that are contributing to this strength; but determining which driver has greater stability and influence is essential to gauging the momentum and objective of the current upswing.

North American Commodity Update

Commodities - Energy

Is Crude’s Rally a Factor of Market Flows, Fundamentals or Technicals?

Crude Oil (LS NYMEX) -  $81.57  //  $2.21 //  2.78%

Despite the inconsistency in liquidity, crude oil has rallied for eight consecutive sessions to test October’s swing high (though not overtaking it) and subsequently mark its highest close in 14-months. There is a considerable round of fundamentals, technicals and unusual market conditions that are contributing to this strength; but determining which driver has greater stability and influence is essential to gauging the momentum and objective of the current upswing. No small part of today’s volatility can be attributed to the fact that it is the first full trading session of the year with a general return of liquidity. With traders and money managers reinvesting money sidelined through the year end (for accounting purposes or to generally avoid the volatility often associated with the thin trading conditions), there is a natural buoyancy to traditional asset classes. What’s more, with interest and prices rising for equities and commodities; there is a natural boost to risk appetite that has in turn weighed the US dollar. Considering the commodity is priced in the currency, the biggest drop in the greenback (on a trade-weighted basis) since November 25th offers another level of support.

And, while there are temporary factors luring oil prices higher; there are more tangible and lasting aspects to the market’s advance. Always working on the supply-and-demand balance, forecasts for consumption have been leveraged by a cold front that is pushing through the United States. According to the US National Weather Service’s forecasts, temperatures across the eastern half of the country will be below normal through January 17th. This is not a sudden change in weather either. Temperature and weather has been an issue for the United States for some weeks now. In fact, heating oil supplies have contracted for six consecutive weeks – the longest such trend since April of 2008. Speculation over economic activity was another dynamic that altered demand projections. A dense round of manufacturing activity reports offered the best reading in over five years for China, three years for the US and two years for the UK. There have been many signs of an improving global economy to this point; but indicators that also gauge energy consumption like these factory reports offer the most direct impact to crude. Finally - not to be discounted in today’s volatility - a pricing dispute between Russia and Belarus led the former to briefly cut supplies to the later – though the tap was quickly reopened. Though threats of this nature are not uncommon in this region and it was only a brief incidence; it did add to concerns about stability in energy supplies.

Commodities - Metals

Gold Marks its Biggest Rally in Two Months as Risk Advances and the Dollar Recedes

Spot Gold  -  $1,119.98  //  $22.65 //  2.06%

With equities and commodities on the advance, gold would naturally benefit from the rise in risk appetite and subsequent drop from the US dollar. With the benchmark currency seeing its sharpest selloff in a month, it should not in turn be a surprise to see the precious metal close its biggest one-day rally in two months. This is especially true given the state of volatility of the past month. Price action and trends have been more or less absent through this period as underlying risk appetite stalled and individual assets have been left to the qualification of being overbought or oversold. A return of liquidity and yield demand at the start of this year will have to eventually translate into market-wide risk appetite if the yellow metal hopes to maintain its bullish trajectory. While its use as an inflation hedge is seeing distant expectations of price pressures; the immediate future looks relatively reserved. This leaves the roles of dollar hedge and speculative asset responsible for gold’s future. And, since the currency is tied to sentiment, there is an elemental driver to price action. Considering the CFTC’s Commitment of Traders report noted a 7,586-contract drop in speculative holdings to 230,490 and the SPDR Gold Trust reduced its holdings 4.88 tons to 1,128.75 tons; renewed central bank interest or significant trend development in equities may need to soon step in to keep this commodity’s recent bounce going.

Spot Silver  -  $17.49 //  $0.60 //  3.52%

Like gold, silver enjoyed a sharp rally through Monday’s session that shook off the lethargy that has hung over commodity these past three weeks. However, unlike its more expensive counterpart, this metal has not broken away from recent congestion patterns. Maintaining its range between $17.75 and $16.75, silver is still looking for direction; and in this sense offers a better reflection of underlying risk appetite (which itself has yet to establish a true bearing). The dollar’s direction over the next few days and demand for higher yielding assets will determine which side of its congestion zone silver breaks. In the meantime, the COT figures reported a 957-contract drop in speculative long interest to a net 38,721 contracts.



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

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