Oil Extends its Risk-Based Recovery with the Largest Single-Day Rally since November

North American Commodity Update

Commodities - Energy

Oil Extends its Risk-Based Recovery with the Largest Single-Day Rally since November

Crude Oil (LS NYMEX) -  $77.12  //  $2.69 //  3.61%

The recovery in yield appetite continued Tuesday, and the subsequent effects on the energy markets were pronounced. Feeding off the improvement in sentiment across other capital markets, crude oil easily cleared recent resistance around $75 in the biggest single-day rally for the commodity since November 16th. From a speculative perspective, this reversal was properly timed and finding the right level of momentum to potentially establish a meaningful trend. However, there is a notable lack in the volume that is supporting this budding reversal – an unusual situation if the market is indeed establishing a bullish footing. Looking at speculative interests outside the energy complex, the Dow Jones Industrial Average has marked a new weekly high and is now working to recover some of the lost ground in the three-day plunge beginning on January 20th. On the other side of the spectrum, the US dollar (the primary pricing instrument for oil) has corrected from six-month highs. Should investor sentiment maintain its influence over speculative markets, expect oil to keep its high positive correlation with stocks and negative correlation to the greenback.

As for fundamental considerations, the bullish influence of yesterday’s manufacturing data is still carrying the markets higher. However, with demand still significantly below the levels of just a year ago; it wouldn’t take much from supply-and-demand fundamentals to stall the market’s budding recovery. Today, the headlines for energy traders was somewhat mixed. The only market-moving piece of economic data crossing the wires was the US pending home sales report for December, which would subsequently fall in line with the consensus forecast. Long-term economic activity aside, demand in the US could be stoked by below-average temperatures for the East Coast predicted by the National Weather Service between February 7th and 11th. In contrast, the average price per gallon of gasoline reportedly fell for the 20th consecutive day. This gives us something to look forward to in tomorrow’s DoE inventory figures for the week ending January 29th. Crude and gasoline stores are expected to rise 400,000 and 1.4 million barrels respectively, while distillates are seen falling by 1.15 million barrels. Outside the US, OPEC Secretary General Abdalla El-Badri projected energy demand would not likely increase until the second half of the year. Furthermore, he said oil stocks were high at approximately 80 million barrels. His suggestion that investments would be hampered with crude prices below $70 per barrel means there is likely an unspoken level of support for the world’s largest energy producer.

Commodities - Metals

Gold Finds Strength in Sentiment, Dollar Weakness as Resistance Comes Into View

Spot Gold  -  $1,115.35   //  $9.85 //  0.89%

Though there are a few fundamental drivers supporting gold, the extended recovery in speculative interests is the lynchpin for the commodity’s strength these past few days. The metal put in for a second daily advance that would bring spot into the path of a tentative, descending trend developing from December’s record high. To prevent a possible bearish breakout within a week’s time, the market will have to overtake resistance and offset the breakout pressure in the wedge pattern that is currently forming. For fundamental drive, risk appetite is taking sole responsibility for gold’s bearing. The Dow put in for its biggest back-to-back rally these past two days since the two-day performance through October 6th. The impetus for this drive is sourced from the same catalyst that first weighed capital markets back on January 20th – cumulative speculative interest. Further leveraging the precious metal’s advance, the dollar would put in for its first consecutive daily declines in nearly three weeks. As one of the market’s favorite dollar-hedges, this is a considerable boon for gold bugs. For tangible fundamental drive, inflation expectations continue to buoy the value of gold. The iShares Treasury Inflation Protected Security Fund is hovering just below a two-month high. Adding to the global threat of price pressures, the RBA surprised the market by holding its benchmark lending rate at 3.75 percent and Chinese officials raised concerns over asset inflation by enforcing new rules on third mortgages. As policy officials maintain loose monetary policies to support the economic recovery, expect inflation risks to increase significantly over the coming months.

Spot Silver  -  $16.73 //  $0.06 //  0.36%

Despite the clear strength in underlying risk trends and a fading US dollar, silver would put in for a very modest advance through Tuesday’s session. Barely tipping into the green, the metal is struggling at $16.75 – a level that has historically caused troubled for momentum development. In this relatively reserved session, silver is showing a greater correlation to the dollar’s controlled decline and highlighting the fewer fundamental roles the asset plays in the financial markets compared to gold.

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