Oil Traders Hesitant in Showing Confidence after Hungary Backtrack

North American Commodity Update

Commodities - Energy

Oil Traders Hesitant in Showing Confidence after Hungary Backtrack

Crude Oil (LS NYMEX) - $71.12 // -$0.39 // -0.55%

Risk appetite and confidence in the performance of the global economy remained depressed through Monday’s session despite efforts to revive investor sentiment. For crude – which relies on forecasts for consumption trends as well as speculative interests – the deflated state would keep the active nearby contract on the NYMEX near an eight-month range low while the market’s volatility reading hovered just below an 11-month high 49 percent set just two weeks ago. Bulls were looking to the change in tack by Hungarian officials - recanting warnings last week that the economy was on the verge of default - to immediately revive confidence. However, this reversal would leave market participants skeptical over the European region’s economic and financial health especially when it comes to reinterpreting the overly-optimistic take that policy officials voice. What does financial trouble for Hungary mean to energy traders? A default for this periphery European Union member could lead to significant losses for neighboring nation’s which had invested in the nation’s debt; and more critically it could dramatically depress confidence in the European region in general. This could lead to a full-blown financial crisis for the region or even the world and thereby curb speculative interest in risky assets like crude. Furthermore, with financial health on the decline, growth would almost certainly be undermined, further stalling a necessary balancing of supply and demand factors for the market.

Returning a modest level of optimism to the commodity through the day were a few macroeconomic indicators on the European and US dockets. During European trading hours, two indicators of note boosted confidence and demand expectations: German factory orders and the Sentix Eurozone Investor Confidence survey. The April orders number would unexpectedly grow 2.8 percent, leading the yearly figure to expand at its fastest pace on record (29.6 percent). This is a critical measure of economic activity for Europe’s largest economy. Offering a different view, the Sentix confidence report for June unexpectedly recovered from its worst tumble in two years, though the measure would still reflect net pessimism for the 23rd time in 24 months. This is a promising turn given the very severe concern surrounding Europe’s financial future. Another booster for growth, and thereby demand, forecasts came from the US consumer credit report for April. Unexpectedly rising $1 billion, this report suggests that consumer spending is on pace to recover and lending conditions are improving – both critical steps towards robust expansion for the world’s largest economy.

Taking a different approach to the futures market, there are a few things to note about recent price action. The first is the lack of response to Friday’s plunge. While price action was quite substantial this past Friday in response to the Hungary news and its speculative fallout, both volume and open interest on the benchmark NYMEX contract were relatively unchanged. That suggests a lack of follow through on the news. Another interest note is that the spread between the active WTI contract traded in the US and the Brent contract standard in the UK is once again widening (and now at $0.89). Finally, contango in US oil markets partly in response to the Gulf of Mexico oil spill and its expected impact on regulations expected to be adopted in its wake. The difference between the active contract and that eight years forward is a remarkable $22 per barrel.

Commodities - Metals

Euro’s Persistent Tumble Sends Investors to Gold as Safety Sought Outside Currencies, Government Debt

Spot Gold - $1,241.35 // $21.45 // 1.76%

Just when it seemed investor sentiment has stabilized, gold has surged ahead. Spot trading record its biggest one-day rally in nearly a month, bringing the market dangerously close the record highs set back in the middle of May. Interestingly enough, the CFTC’s Commitment of Traders survey reported net speculative long positions actually fell by 1 percent to 224,546 contracts on the Comex in the week through June 1st. In reality, this is a modest slip given the proximity of open interest to the record high set this past October. However, today’s upsurge would not originate from positioning news. Strength was instead found on the need for safety and an alternative to the traditional ‘risk-free’ assets. This may seem an unusual development given Hungary’s reversal on its default warning from Friday; but in truth, confidence in policy officials’ commentary has diminished remarkably in recent months. Last week’s warning stands as a remarkable episode of candidness that will not be soon forgot by investors that are skeptical of the future. Furthermore, the fact that the euro was unable to make up lost ground against the benchmark US dollar on this news confirms investors’ position and stokes demand for an asset that can avoid the most severe financial ripples that would result in a global crisis. Further adding to the impression of uncertainty, German Chancellor Merkel announced 80 billion euros in budget cuts over four years, lending liquidity in China further dried up according to seven-day repo rates and Spain prepared for another strike tomorrow. It wouldn’t take much for spot gold to set a new record high in the near future.

Spot Silver - $18.19 // $0.74 // 4.24%

The first advance in five trading sessions has led spot silver to more than recover the ground lost Friday after equities collapsed. The fundamental spark for this metal was not hard to spot. Considering risk appetite was slipping alongside traditional speculative markets like equities (the S&P 500 fell 1.4 percent), silver traders were taking direction and intensity cues from gold. Interestingly enough, other members of the precious metal group were looking at modest gains of their own while industrials fell substantially. This may reflect a rise in demand for a safe haven on the level of gold but well below its exorbitant cost.

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