Crude Maintains Momentum and Extends its Strongest Run in 13 Years

North American Commodity Update

Commodities - Energy

Crude Maintains Momentum and Extends its Strongest Run in 13 Years

Crude Oil (LS NYMEX) -  $83.18  //  $1.41 //  1.72%

Sometimes it isn’t difficult to discern what fundamental drivers are taking the lead on price action. For crude oil today, the responsibility for a prominent break and the extension of a historic run clearly fell to speculative momentum and a notable weakness in the US dollar. Today’s advance was remarkable in that it marked the 10th consecutive daily advance – the longest, bull trend for the commodity since 1996 – and cleared the closely-watched $82 level to push a 14-month high. How stable are these new heights? That all depends on what kind of fundamental support the market can muster going forward. The burden to maintain these levels (much less the momentum impressive run in momentum over the past two weeks) grows exponentially. Considering other barometers for risk trends (like the Dow Jones Industrial Average) haven’t confirmed a revival in investor optimism just yet; the market will likely look for yield appetite to spread across the markets into the end of the week to confirm crude’s progress. In the meantime, the dollar’s gradual decline is helping to maintain the commodities general bias. Since most crude deals that are made across the world are executed in dollars, there remains a strong negative correlation between the two instruments.

Taking into account tangible fundamental trends, oil’s drive may soon come under pressure. Bolstering expectations for demand, arctic temperatures have descended on the Northern hemisphere and are thereby boosting demand for refined and crude energy products alike. However, there has long been a significant excess in capacity for most producers and refiners; so it remains to be see whether the cold front can materially work down bloated supplies. Considering today’s Department of Energy inventory figures, the argument isn’t so clear-cut. According to the government’s report, stockpiles of crude oil grew 1.329 million barrels in the week through January 1st against expectations of a 1.0 million barrel contraction. This was the first increase in five weeks. Gasoline holdings similarly surged 3.737 million barrels against a far more modest outlook for growth and distillate fuel inventories eased 233,000 barrels. These numbers suggest refiners can readily resupply swollen should the opportunity present itself.

Commodities - Metals

Gold Rallies as the Dollar Eases, Investors Seek Volatility

Spot Gold  -  $1,138.40   //  $20.40 //  1.82%

With the dollar in retreat and other key commodity groups on the rise, gold would catch the bullish wave. However, speculative interest in physicals rose – as evidenced by volume levels – despite a relatively staid sense of risk appetite across the broader market. Equities and fixed income were essentially unchanged for the day. Nonetheless, gold marked its second most aggressive daily climb in six weeks and is now targeting congestion highs not seen since the December 17th. For its other fundamental roles in the speculative market (inflation and dollar hedge) the commodity found a genuine reason to appreciate. The US dollar lost its footing through Wednesday’s US session with disappointing data and burgeoning concern that the Federal Reserve will defer interest rate hikes. At the same time, the FOMC minutes from the last policy meeting also showed a growing debate among policy makers over whether inflation would accelerate in the near future. Some argue that spare capacity in the economy will dampen price pressures while others fear commodity prices and efforts to improve businesses’ bottom lines will lead to growth. Regardless, the fundamental dispute will likely stay the central bank’s hand on near-term policy adjustments that could allow price trends develop.

Spot Silver  -  $18.20 //  $0.42 //  2.33%

Risk a clear demand for commodities and a modest pull back in the US dollar, silver would develop extend its rally to clear the closely watched $18 level and further an bull trend to five consecutive bullish days, the best performance for the metal since early September. For fundamental leverage Tuesday, the dollar’s 0.3 percent pull back (on a trade-weighted basis) – though not enough to confirm a new trend – was enough for speculators to take interest in commodities as opposed to an equities market that is still stuck in the mud. A clear revival in risk appetite or indisputable bear trend in the US currency can easily ramp up silver’s drive; but the opposite from either driver could quickly cut the market’s run short.

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