Crude Stalls One Cent from 13-Month High as Speculative Momentum Runs Dry

North American Commodity Update

Commodities - Energy

Crude Stalls One Cent from 13-Month High as Speculative Momentum Runs Dry

Crude Oil (LS NYMEX) -  $81.26  //  -$0.25 //  -0.31%

Crude was hovering just below key resistance through the end of the US session with flagging speculative interests weighing against burgeoning forecasts for demand on the backdrop of frigid temperatures across the world. Futures trading on the NYMEX reported a market increase in activity from the final weeks of December; but overall volume is still significantly below the average of for the past year. This is a discouraging trend considering the consistent and aggressive move in underlying price action. Depending on how the US session closes, crude could print its ninth consecutive daily advance – the best trend for the commodity since July. However, with the key $82.00 level stationed directly above; speculative interests will have to find increased support from supply-and-demand speculation to maintain the impressive rally of the past two weeks. 

However, even if traders throttle back on buying crude for exposure to risk trends and capital gains, there may still be enough drive through natural demand to carry the market to the meaningful break and perhaps defer a correction for a little longer. Weather forecasts around the world are reporting frigid temperatures in key industrial zones that is leveraging demand for distillates and in turn crude. The US is expected to suffer another cold snap that will engulf the entire nation. Below-freezing temperatures are expected to spread to the Southern half of the country, while the Northeastern region (which accounts for the bulk of the nation’s demand) is expected to suffer even more inhospitable conditions. According to some meteorologists, the Eastern seaboard is expected to suffer its worst winter since 1982. Putting these fundamental conditions into a trading context, this cold snap may help to balance demand and supply and offset the slump in energy consumption that comes out of the slow recovery from the global recession. For an objective reading on demand (and perhaps a catalyst for a breakout or reversal from crude), tomorrow’s US Department of Energy report is expected to reported yet another weekly decline in inventories. A forecasted 1.0 million barrel decline in crude stockpiles would extend the longest period of weekly contractions (five) since July. If weather doesn’t work down supplies, it could be a sign that suppliers are able to ramp up production due to excess capacity and thereby maintain lower prices.

Commodities - Metals

Gold’s Advance Stymied by Dollar Bounce

Spot Gold  -  $1,116.50  //  -$4.70 //  -0.42%

With risk appetite stalling in equities, currency and fixed income markets, it was only natural for gold to curb its own progress following its biggest one-day rally in two months. Investors in all asset classes have likely reinvested all those funds that were sidelined through the holiday period to avoid thin liquidity and to book profit or loss for accounting purposes. To recharge speculative interests, the market will have to hit the next level of bullishness and draw in capital that is still tied up in relative safe investments. The burden to recharge the bullish drive is perhaps greater for gold than another security (like equities) because the metal is just off a record high and is already prohibitively expensive to many potential investors. Another tripping point for gold was the dollar’s recovery through Tuesday’s session. The greenback recovered from a potential bearish breakout when risk appetite stalled in other corners of the market. The currency’s rebound is somewhat surprising given the drop in speculation surrounding FOMC rate hikes (the biggest drop since December 1st). On the other hand, a long-term effort to diversify away from the primary reserve currency as well as an emerging presence of inflation could stand in as a bullish backdrop for the commodity and prevent a more enveloping reversal. The Euro Zone released its leading CPI inflation expectation report for December; and the increase in pace to 0.9 percent annualized growth shows that yet another key region is recording price pressures.

Spot Silver  -  $17.57 //  $0.09 //  0.51%

Where gold would reverse early and moderate gains, silver was able to establish a second and respectable daily advance Tuesday. The biggest two-day advance since November pushed spot up to its highest level in a month (though the commodity has yet to clear the $18.00 to $17.75 zone of resistance that has defined price action for the past three months. Why the disparity between the two metals? Gold’s relative expensive makes it far more sensitive to smaller changes in risk trends and the US dollar. For its sister metal, more affordable prices allow speculators to hold with the trend a little longer and swings can further be more volatile.

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