A Revival of Risk Aversion and Cooling in US Manufacturing Puts Oil Under Pressure Tuesday

North American Commodity Update

Commodities - Energy

A Revival of Risk Aversion and Cooling in US Manufacturing Puts Oil Under Pressure Tuesday

Crude Oil (LS NYMEX) -  $72.37  //  -$1.60   //  -2.16%

It is as if fundamental factors are working in league with notable technical events to keep US crude under pressure. After an extended holiday weekend, the NYMEX futures exchange opened Tuesday to significant selling pressure. Initially, the morning’s opening decline was a carry through on the equity market’s slide through Friday’s close (which commodities would not participate in due to the earlier close for the exchange) and a more liquid response to the uncertainty in global finances that the Spain downgrade leveled. However, the bulk of today’s losses were more accurately attributed to a general deterioration in fundamental health through Tuesday’s session.  News this morning that China is finding it increasingly difficult to drain liquidity from the economy and the ECB warned that regional banks may have to write off 195 billion euros worth of bad debt through 2011. These concerns keep the market firmly set within the risk aversion frame of mind and offset the attempt to revive risk appetite that was made with last week’s high-level volatility. Speaking of volatility, the downtime for energy traders has not tempered their proclivity for speculating. Along with the second consecutive daily decline in WTI crude futures, the CBOE’s volatility index has jumped over 5.5 percentage points to 46 percent. Looking at a more stable reflection of activity levels, the 20-day moving average of the volatility index is at its highest level in seven months.

From speculative uncertainties to fundamental distress, today’s macro-economic event risk would do little to assist oil prices. Beginning with news this morning that Chinese manufacturing unexpectedly cooled through May, the evidence that global economic activity is cooling is dropping off from the even the most robust economic performers. The other big-ticket indicator to cross crude traders’ desks Tuesday was the slip in the US ISM manufacturing report. Though the 59.7 reading was slightly better than the forecast number, the figure was a modest downgrade from April’s report. And, considering this particular indicator reflects raw material demand from the world’s largest petroleum consumer (not to mention factory activity has stood as one of the primary drivers for US economic growth in the country’s so-far robust recovery), this indicator carries a certain weight.

Looking ahead to the coming 24 hours, oil traders will be looking to equities, the US dollar and other key barometers for market sentiment to garner a bearing on their own positioning. Given the quick reversal to the mid-point of the May tumble, the speculative element behind the market will hold a greater influence over establishing a direction for fundamental traders to follow up on. For tangible event risk to work with, there scheduled docket is otherwise light. Tomorrow’s API inventories for the period through May 28th are coming out a day late due to the holiday period. Also, the impact that the BP spill in the Gulf of Mexico has on regulation in the US and growing tensions in the Middle East and the Korean peninsula will give participants more to keep track of.

Commodities - Metals

The ECB Turns Global Investors to Gold for Safety

Spot Gold -  $1,224.85  //  $8.65  //  0.71%

Despite the incredible volatility across the speculative spectrum Tuesday, gold would slowly work its way to a new two-week high. In fact, the slow push back above $1,220 was reflected in the CBOE’s volatility index for the precious metal’s futures activity with the first increase in six days measuring a modest 0.7 percentage points (this compares to the dramatic plunge from the gauge intraday Friday measuring 2.76 percentage points). The reason for this modest level of activity can once again be traced back to its fundamental role in the global financial market: as a safe haven that is specifically tailored as an alternative to fiat currencies and government debt. The warning from the European Central Bank today that they could see difficulty in selling bonds going forward which could further lock up the market for regional governments vying for liquidity. Furthermore, a forecast for up to 195 billion euros worth of loan losses from euro-banks through 2011 threatens to destabilize the regional credit markets and perhaps set off another global financial crisis. Going forward, the traditional back and forth for flippant speculative interests will matter far less than long-term uncertainty in the liquidity and fungibility of traditional assets.  On the other hand, that does not mean that a particularly strong shift in risk could not generate a hearty increase in risk volatility for gold itself.

Spot Silver  -  $18.40   //  -$0.17  //  -0.90%

Given the marked activity in background risk appetite trends and the relatively modest change in safe haven gold, silver’s fundamental concern was obvious. Reverting to its speculative appeal, the precious metal put in for a moderate decline Tuesday that would closely mimic the performance of equities from the open of the Asian session to the close of the commodity’s market during US hours. Looking at delayed market performance data (through this past Friday), volume has steadily trended towards its lowest levels this month while open interest has slowly build up into the past two weeks’ bullish reversal.

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