The Blossoming of Another Possible Financial Crisis Unnerves Crude Oil Speculators

North American Commodity Update

Commodities - Energy

The Blossoming of Another Possible Financial Crisis Unnerves Crude Oil Speculators

Crude Oil (LS NYMEX) - $82.15 // -$2.05 // -2.43%

There should be no doubt that the oil markets are not simply populated by those looking to hedge their exposure to physical supply and demand. This market – like most others – is heavily influenced by speculative interests. Today, those speculative ties would lead the benchmark NYMEX crude oil contract to its biggest drop since April 16th. And, for an objective view for those pointing to the unique influence that the Cushing Oklahoma inventory build may have, the active Brent futures contract would suffer its biggest slide in six active sessions (though there was a notable difference in the severity of losses between the two that does speak to the building premium between the two). Looking for the catalyst for Tuesday’s rebound in volatility, it was hard to miss the influence the Standard & Poor’s downgrades to both Greece and Portugal had on the international markets. For the Euro-area, the ‘junk’ status for the former is another step in the nation’s ever-deteriorating financial position. At this stage in the game, it is highly unlikely that even if the EU/IMF finally do agree on the conditions of the 45 billion euro rescue package that such a figure would stem the bleeding. However, it may be Portugal’s two-step downgrade that is most disconcerting. While Greece is the more troubled European Union member, Portugal’s descent suggests credit troubles and investor fear is spreading across the continent. It will be difficult enough for policy makers to craft a rescue for one economy, bailing out two or more would be nearly impossible.

However, mere panic selling isn’t the extent of the oil market’s exposure to this financial disruption. The true fundamental impact from this event could lead to a medium-term slump in demand. The global economy’s economic recovery is still young. Another period of distress in a system that is already fragile and highly leveraged with government assistance could stress nations and markets far more than they were in the original decline. Following the line reasoning to crude demand, the spread of financial troubles across Europe could easily sap liquidity and credit availability across the globe. In turn, investment would dry up and consumer loans disappear with a very real impact on economic activity. Long-term concerns like these that temper growth forecasts have been around for some time; but it takes an immediate jolt to bring such concerns to the forefront. In the meantime, other economic news was relatively supportive of growth and demand. A consumer confidence survey for the US reported the highest level of optimism since September of 2008. Whether this actually translates into pull through demand for raw crude (which is refined into gasoline and heating oil as well as in the production of other goods) remains to be seen. Perhaps the supply side of the balance can readjust the equilibrium. Tomorrow, the US Department of Energy will release its inventory report for the week ending April 23rd. Far from a bullish bearing heading into the release, stockpiles of oil are expected to have grown another 1.05 million barrels for the 12th increase in 13 weeks.

Commodities - Metals

It’s a Battle between Gold and the Dollar for the Role of Top Safe Haven

Spot Gold - $1,167.30 // $13.80 // 1.20%

Whether gold is playing the role of a safe or speculative asset at any one time depends on both the primary fundamental concern behind the market and the intensity this particular driver may retain. News today that both Greece and Portugal were downgraded by Standard & Poor’s has triggered a demand for safety and encouraged investors to diversify away from high-risk speculative positions. So, while the precious metal maintains its appeal as a speculative commodity that trades not far from a record high; it is the asset’s value as an alternative to government debt and currencies that truly drives the market. Acting as a catalyst for the spread of uncertainty, Greece’s national credit rating was cut to junk status – preventing the nation from using its debt as collateral for vital ECB loans and leveraging investors’ demand for return for giving the nation capital. This pushes an already troubled economy deeper into a hole. However, it is Portugal’s own downgrade that is the real concern. A deterioration in the credit of one economy already on the way down is to be expected; but a reduction from another EU member points to broader troubles that could infect a region or the entire world. That being the case, investors will try to limit sovereign debt risk in masse and will look for an alternative to both government debt and currencies in general. This explains gold’s advance to record highs in terms of euros, pounds and even the Australian dollar. Yet, the dollar, and the treasuries that support it, is a more recognized safe haven for capital. Therefore, the two week high in gold priced in dollar’s points to particular strength beyond mere speculative interests. That being said, the SPDR Gold Trust (the largest ETF backed by gold) reported a net 6.1 ton increase in assets to a record 1,146.2 tons yesterday.

Spot Silver - $18.20 // -$0.10 // -0.53%

What would gold’s day look like if it was not considered a benchmark, ‘risk-free’ alternative to the more traditional government debt crowd? For that answer, we look to silver. A metal that does not have the historical appeal as its more expensive alternative as a store of wealth, silver actually fell on the day and would not even come close to the four-month highs set just two weeks ago. Making this commodity’s progress even more troublesome, the US dollar would enjoy its own advance on safe haven flows and further pull silver down.

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