Better Than Expected US Spending Report Struggles to Keep Crude Above Water

North American Commodity Update

Commodities - Energy

Better Than Expected US Spending Report Struggles to Keep Crude Above Water

Crude Oil (LS NYMEX) - $78.01 // -$0.85 // -1.08%

There was more than enough reason (from a fundamental perspective) to see US crude higher to start the week. Therefore, the benchmark energy contract would naturally fall on the day. On the face of thing, risk appetite turned bullish for brief spats during the active New York session; but market interest was ultimately little altered on the day with the Dow Jones Industrial Average down nearly unchanged at 10,138 and the S&P 500 easing back 0.2 percent to 1,075. Interestingly enough, the commodity was still on the defensive despite the strong performance of shares during the European hours. The foundation for sentiment on the day can be partly attributed to the outcome of the G20 meeting. While this gathering would not offer any shocking revelations, there was a vow to maintain stimulus for the immediate future along with a target to halve deficits by 2013. That is a loose fiscal and growth promise that speculators can spin in their favor; but skeptics can easily punch holes in the outcome.

Given that sentiment was ultimately drifting sideways on the day; it is further interesting that today’s fundamental supply-and-demand factors wouldn’t contribute more to price action. Finally turning energy traders back onto the weather, Tropical Storm Alex is threatening to upgrade to a hurricane as the world tracks its path out through the bottom of the Gulf of Mexico. From a more quantifiable impact on demand, where Japanese retail figures would curb expectations for consumption from the world’s second largest economy; its largest (the US) reported a bigger than expected increase in consumer spending through May. The 0.2 percent increase in expenditures from a sector that accounts for approximately three-quarters of overall GDP bodes well for production and thereby energy demand. On the other hand, the slip from the Chicago Fed’s National Activity Index should give reason for reflection – the economic recovery really is not that strong.

It is perhaps market activity that truly accounts for the commodity’s underperformance. Looking at trading activity, the August futures contract on the NYMEX exchange showed a significant drop in volatility (201K turnover) while open interest has leveled off at 310K. The big picture shows aggregate volume (the cumulative turnover in all contracts) further slipped to 0.497K – from a high of 1.424 million set just months ago. Furthermore, total open interest is at its lowest since January 6th. Looking for temporary skews in the market, the difference between the active nearby NYMEX contract and the two years deferred ticked slightly higher to $6.20 while the gap between the US and UK benchmarks grew to $0.64 in the WTI’s favor. These conditions point to modest – if any – inequity. Something for traders to take note of however was the 20 percent increase in net speculative long positions through June 22nd. The 6,705 contract increase (to 39,635) was a sharp correction from a 10-month low in positioning.

Commodities - Metals

Has the G-20’s Loose Vows for Fiscal Responsibility Prevented Gold from a New Record High?

Spot Gold - $1,239.05 // -$16.55 // -1.32%

A record high was within reach for gold traders this morning; yet an intraday rally on the open of US banking hours would immediately fizzle and ultimate turn into a $27 peak-to-trough reversal. If there were any need of evidence that this particular security is deviating from the normal risk appetite/aversion track, today’s performance would confirm it. Through the trading day, risk appetite was either positive or unchanged; and yet, the traditionally safe-haven metal would actually tumble through the opening hours of the US session. The expiration of the active June 2010 COMEX futures contract and rollover to the next liquid alternative no doubt had its impact on price action (hence the sizable drop at the open of the New York session). This likely reflects a considerable front-end interest in the futures market whereby a greater segment of the speculative crowd is holding off from buying the physical at near record prices. That being said, the CFTC’s commitment of traders figures for net long speculative interest reported a 4 percent increase in holdings through the week ending June 22nd to 238,634 contracts – just 9 percent off the record high set back in November.

On the other hand, contract rollover alone cannot claim full responsibility. This morning’s headlines carried a few updates that were specifically tailored to gold as a alternative asset to the world of more traditional trading instruments. Typically, G-20 gatherings are of little concern to investors of any class as authorities rarely come to any meaningful agreements. However, there seemed to be some level of headway from this summit. According to the joint statement, the world’s largest economies have committed to maintaining stimulus through the immediate future; but there was also an agreement to attempt to halve their respective deficits by 2013. While still a loose commitment, it nonetheless gives a hard objective with a clear time frame – something we have not seen on a shared basis since financial stability collapsed. Acting as a counterpoint to this stabilizing effort, gold traders were supported in their safe haven holdings given the uncertainty surrounding the European Union’s financial health this week. This week, the ECB’s Long-Term Refinancing Operation is scheduled to expire; and European banks will have to repay 442 billion euros to the central bank. How much of this will be rolled back into three-month paper will signal to the market just what kind of shape the region’s lenders are in.

Spot Silver - $18.78 // -$0.31 // -1.62%

Risk appetite was by no means robust this morning; but the moderate performance of benchmarks like the Dow would not explain silver’s bearish performance Monday. However, looking at an intraday chart of this precious metal overlaid with a gold chart of the same frequency would give us a clear explanation of how things transpired. A morning plunge from the metal matched the performance of its pricier counterpart. Considering the June 2010 contract expired today; this is not an unusual turn of events. Looking at speculative interest, the CFTC’s Commitment of Traders figures report a 7 percent increase in net speculative long positions to a balance of 40,051 contracts.

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