Crude Elicits another Swing of a Tight Range as Risk Trends Clash

North American Commodity Update

Commodities - Energy

Crude Elicits another Swing of a Tight Range as Risk Trends Clash

Crude Oil (LS NYMEX) - $78.81 // -$0.85 // -1.07%

Volatility behind oil futures was relatively tame throughout Monday aside from a brief period during the early afternoon hours of the US session. Nonetheless, this short-lived move was momentous enough to span a frequented range loosely established between $80.50 and $78. This is a relatively modest range considering the level of volatility behind price action. This combination of high activity and limited room to run reflects the indecision in investor expectations for risk appetite; but technically and fundamentally, it is also a sign that something will have to give soon. For fundamental impetus this morning, there was a distinct departure from correlation between crude and underlying sentiment trends. Through all three major sessions (Asian, European and US) on Monday, equities were on the advance – though the pace was relatively restrained. The popular consensus among market commentators is that the advance in stocks was reflective of confidence behind a meaningful resolution to potential crises developing in the Euro Zone and UK. Yet, a tumble from the euro and pound discard this theory. In reality, there was little consistency in underlying sentiment across the various asset classes; and these particular circumstances likely allowed oil to adopt the universally high-level of volatility while allowing the commodity to defer to its own technicals and fundamentals for direction (or lack thereof).

For supply-and-demand considerations, there were many big-ticket economic releases on which to refine expectations for economic activity. Offer the most straightforward read on oil consumption forecasts, the series of February manufacturing sector activity reports would disappoint. Among the headlines this morning, the biggest drop from the US ISM factory activity gauge in 14 months and a year-low in the Chinese counterpart to this report indicated a cooling in production efforts from the world’s two largest energy consumers. In other news, the US reported an improvement in consumers spending – which accounts for more than three-quarters of the economy. Spending through January rose for a fourth consecutive month by 0.5 percent. These are promising figures; but in truth their influence on demand for crude has already been factored into the commodity’s fair value. From this standpoint, tomorrow’s API inventory figures and Wednesday’s DoE numbers will offer a more lasting influence on the equilibrium between supply and demand. This is especially true for the government’s report considering the consensus for a fifth weekly increase in stockpiles of 1.05 million barrels would mark the long period of expansion since the period ending May 1st.

Watch our weekly, live coverage of the DoE Inventory figures every Wednesday beginning at 10:15 AM EST.

Commodities - Metals

A Rally from the Dollar and Dow Keeps Gold Little Changed Monday

Spot Gold - $1,118.05 // $0.45 // 0.04%

It is unusual to see gold carving such a small range while the other speculative benchmarks have developed impressive levels of volatility; but this reserved pace does have its fundamental groundings. Looking at a chart of the precious metal, Monday’s range was the smallest seen since February 15th. From a technical perspective, this can be described as stalled momentum in the face of a closely monitored $1,125 figure. Alternatively, looking at the economic dynamics of this tempered pace, we see some of the market’s primary drivers offering conflicting bearings. For gold’s role as a speculative asset, equities would advance steadily through the day. On the other hand, the metal’s function as a dollar-hedge would work against it as the currency established hearty gains against key counterparts through the early hours of the US session. Considering the greenback frequently follows its role as a safe-haven currency, this divergence between risk trends and dollar under high volatility conditions is unusual. As the week wears on, these various roles will likely realign themselves and a clear bearing on risk appetite will put the gold back on trend. In the meantime, perhaps the collection of central bank rate decisions (starting with the RBA’s meeting early in Tuesday’s Asian session) can develop the argument of whether fiat currency or precious metal represents the better store of wealth.

Spot Silver - $16.46 // -$0.02 // -0.12%

Silver has a dual role among the fundamental crowd. As a precious metal, there is a clear value as a speculative instrument. On the other hand, it also maintains an industrial use as affordable metal. This unique position doesn’t often lead to significant imbalances because its economic use is usually dwarfed by the volatility behind risk sentiment trends. However, a sharp rally in copper prices this morning in response to the earthquake in Chile (the world’s largest producer of the metal) would lead to a meaningful advance in the base metals complex. At its day high, silver was pushing a record high; but a retracement in copper and relatively strong dollar would eventually lead silver to a modest change for the day. Discuss gold and oil trading with other traders in the DailyFX Forum

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