A Plunge in Risk Appetite and Disappointing Data Sends Crude Oil Careening

 

Though crude would retrace some of the losses suffered through Thursday’s session; the tumble was nonetheless meaningful. At its low point, the active NYMEX futures contract was suffering from a four-percent decline from the open. Notably, this drop would breach nearby support at $78 and further bring a prominent rising trend channel that began with the February 5th reversal to an end. What was catalyst for this market’s biggest decline in three weeks? The day’s volatility and trend were developed by a combination of discouraging macro event risk and a broad unwinding of risky positions. Sentiment was arguably the most influential catalyst for the day – as it has been for this commodity for some months now. The presence and influence of risk trends was remarkable in the conspicuous correlation between crude, equities and the US dollar. Standing on opposite sides of the risk spectrum, the greenback’s advance would provide further bite for short interest in the oil market as oil’s primary pricing instrument. However, when projecting whether this breakout can develop into a true reversal; the future is not so clear through the hand-in-hand moves. While these various asset classes tightened ranks and experienced the same, aggressive level of volatility; the momentum behind the developing trend would notably temper into the US session. While there are many fundamental threats to the broader sense of risk appetite; there were no particularly sparks to instigate a collapse today and the limited follow through would reflect that.

 

Outside the speculative realm, economic-based fundamentals would add a tangible motivation for commodity traders to sell. In the US (the largest economy and energy consumer in the world), the top event risk was the durable goods orders. A good reading for the general health of the business sector, the 0.6 percent drop in the ‘ex transportation’ gauge painted the true picture of activity over the next few months. Highlights from the European docket would provide a similarly dour tone. Germany (the largest economy in the region) reported its second monthly increase in the number of unemployed – offering further evidence to confirm officials’ warnings that growth could stall in 2010. Perhaps more dispiriting for demand projections for crude was the downturn in consumer, business and economic confidence figures for the Euro Zone. With this sort of data, closing the gap between supply and demand (demand being the more influential of the two) will be extraordinarily difficult. And, recalling the inventory figures from yesterday: the US Department of Energy calculated a 3.03 million barrel increase in stockpiled (the fourth increase for the longest stretch of gains in nine months) to a four month high of 337.5 million barrels. For a short-term effect, it is also important to factor in the effect of the harsh winter storm that is over the Northeastern United States. 

 

 

 

 

Showing notable resistance to this morning’s risk aversion trend, gold actually found its way higher through Thursday’s session. This was a remarkable break from the pace and correlation that the Dow Jones Industrial Average, crude oil and the US dollar would hold. On the other hand, the US session recovery of risk appetite would suggest that perhaps this precious metal was avoiding a trend that was generally lacking the necessary conviction to support a real trend. Nonetheless, rising only modestly for the first up-day in four sessions, this progress does not yet support a meaningful, bullish reversal. The commodity’s speculative characteristics will likely dominant direction and volatility as the recent history has shown. Yet, gold’s dominant role as a dollar hedge could complicate the situation considering the currency has seen its role as a pure safe haven currency lax somewhat in recent weeks. Within this mix, perhaps we could see gold’s values as a safe haven and inflation hedge play a deciding role. Moody’s jumped on the band wagon with its warning that it may soon downgrade Greece’s credit rating. If this does happen, the volatility it could cause exchange rates and the threat it poses to fiat currency could send investors to the physical store of wealth. As for inflation, inflation has stepped up enough that the US has hiked its discount rate and the RBA rate decision is due tomorrow. And, with the increase in the Euro Zone money supply today, there will be an issue that could gain momentum.

 

 

Silver would initially follow the momentum that equities and other risk-sensitive markets would prescribe it. But with the pull back in the US dollar and rebound in US equities later into the New York session, the metal would recovery most of its losses. Since breaking its rising trend channel yesterday, we have seen bearish follow through immediately arrested. On the other hand, it is difficult to ignore the fact that Tuesday’s aggressive selloff marked the highest level of volume in futures since the tumble on February 3rd and 4th.