Tempered Risk Trends Prevents a Crude Oil Bear Trend

 

Just 24 hours ago, crude was pitched into its sharpest decline in three weeks; and the bullish trend the commodity had carved for most of the month seemed over. However, in a sign that recent high levels of volatility do not have an outlet in the form of a clear trend; the commodity would reverse most of its losses through Friday and position the market back within a broad range between $80 and $77.50. The same lack of conviction amongst speculators was also discerned in equities and currencies through the end of the week – suggesting the masses are waiting on the sidelines until a clear drive is established. Taking note of recent levels of market activity, today’s activity shouldn’t come as a surprise. Aggregate volume on the active oil futures contract has steady declined over the past month while open interest has notably eased off the 20-month high that opened the month. However, drawing a comparison between futures oil prices and another standard for risk appetite (the Dow for example) concludes the former was far more active than the other asset classes. Adding additional encouragement to crude’s advance today, the dollar extended the retracement it began yesterday. As the primary pricing instrument for this natural resource, a decline in currency converts into a higher value for oil.

 

While sentiment’s influence may have held the greatest sway over price action today; macro economic data would certainly provide a promising fundamental backdrop for buying interest. The top headline for the US session was the first revision of the 4Q US GDP report. According to the US government’s report, the world’s largest economy expanded at a faster pace than originally expected. A 5.9 percent annualized clip of growth through the final months of 2009 was the strongest in six years. Further encouragement is found through the notable contributions from personal consumption, business investment and export activity to the headline reading. These are the components that can establish lasting and stable growth – not to mention they are key drivers for energy demand. The same optimism was noted for Europe’s second largest economy – the United Kingdom. The economy grew 0.3 percent over the three-month period - the first expansion since the first quarter of 2008. Yet, both of these GDP numbers are revisions; thereby they hold little, fresh information on the demand side for traders to incorporate. On the supply side, the 3.03 million barrel increase in crude stockpiles reported by the DoE this past Wednesday set the longest period of inventory expansion in nine months and notably pushed holdings to a four month high of 337.5 million barrels. Considering the tame pace of economic activity ahead, supply will have to play a bigger role in closing the gap with consumption if $90 or $100 crude is realistic over the coming year. 

 

 

 

 

Risk appetite wouldn’t exactly rise as much as it stabilized. The drop in capital markets (and subsequent rise in safe haven assets like the dollar) that churned the speculative crowd yesterday proved temporary today. From today’s ‘rebound,’ the Dow Jones Industrial Average and the US dollar would mark relatively modest reversals. Gold would follow a similar pace with a tempered advance that established an especially tight range through the active US session Friday. Rousing investor optimism and the demand for yield would likely require fundamental catalysts that can meaningfully offset the many risks to financial stability that are beginning to spring up from the governmentally-supported recovery. The top market movers over the coming week are the round of central bank rate decisions (the RBA, ECB, BoE and BoC) and US employment figures. From this batch of heavy-weight economic indicators, only the Australian central bank holds a genuine case for encouraging speculative interest through the potential for a fourth rate hike in five months. As a speculative asset, the precious metal will likely find limited strength going forward. On the other hand, its value as a dollar-hedge and safe haven could ultimately put the commodity on a bullish path. From a range of financial uncertainties currently developing, Greece’s predicament could create widespread concern. A default or inadequate bailout effort could undermine confidence in the euro and to some extent all fiat money. In this scenario, gold takes on the combined role of safe haven and currency-hedge.

 

 

After two days of false declines and quick reversals, silver would finally establish a clearly bullish trend Friday. The metal has not overtaken last week’s intraday highs; but it would mark its highest close since the beginning of the month. For the fundamental boost, the combination of underlying risk appetite and the dollar’s retracement would keep the metal within its short-term bullish trend while simultaneously preventing a true breakout. In other news, ETF Securities reported their silver holdings dropped 24 percent yesterday to 6.49 million ounces. Uncertainty is starting to shake investors from those assets that don’t provide dividends or yield.