A Late-Session Rally in the Dollar and Curbed Growth Potential for the US Weigh Crude

North American Commodity Update

Commodities - Energy

A Late-Session Rally in the Dollar and Curbed Growth Potential for the US Weigh Crude

Crude Oil (LS NYMEX) - $75.23 // -$0.71 // -0.93%

Though the first half of the active trading day (through the Asian and much of the European session) would find crude on a bullish track, the climb was anemic at best. When this modest effort to recoup ground lost over the past few days finally capitulated, the subsequent reversal would generate a far more aggressive move. Ultimately, the commodity’s performance was rather staid but fully in line with the activity level of other asset classes. The peculiar thing about the session’s activity however was that it seemed detached from what could be construed as market-moving event risk. With scheduled macroeconomic data that had a clear link to growth forecasts, the results of the weekly US Energy Department inventory figures and a shakeup in underlying investor sentiment through European financial crisis speculation; there was ample opportunity to set the market off. It is even more unusual that oil would not put in for a more dramatic move on the day given the nearby technical boundaries on the active NYMEX futures contract. Support at $75 is a level that will be marked by market participants whether they follow the charts or not.

From a fundamental perspective, risk appetite would follow a few leads through the sessions. The greatest potential for activity on the day was the outcome for the ECB’s three-month LTRO lending facility. This program was an extension of liquidity to European banks with the expiration on the 12-month program scheduled Thursday. Considering 171 institutions bid on 132 billion euros (far less than the 442 billion that will be drained tomorrow), international investors could have taken this to be a sign that one of the most unstable markets in the world is on a better footing than was previously believed. However, skepticism held and the bullish response wouldn’t spread much further than the euro and European shares. Turning back to the tangible supply-and-demand equilibrium, today’s economic data was also mixed. The German labor figures struck a bullish cord with the 12th consecutive monthly decline in the number of unemployment. On the other hand, a UK consumer confidence report would disappoint and the US ADP private payrolls figure would set a discouraging precedence for an already discouraging forecast in this Friday’s NFPs.

For the futures market, the DoE’s inventory figures posed specific event risk. According to data, the crude stockpiles dropped 2.01 million barrels through the week ending June 25th; but this was partly offset by a 537,000 barrel increase in gasoline inventories and the biggest increase in distillates in two months to its highest overall level since the beginning of the year. Given the general glut of inventory overall; this news wasn’t enough to spark a clear run from the market; but it would highlight a divergence in different geographic markets. With Hurricane Alex kicking off an early storm season for the US and discussion over an offshore drilling ban for the Gulf of Mexico leveraging concern, we have seen the difference between the active US (WTI) and UK (Brent) futures contracts grow to $0.90 – its biggest differential since May 30th. For a historical assessment of market activity, aggregate volume on the NYMEX contract line continues to trend lower while open interest bases. This is a sign of general congestion for the market.

Commodities - Metals

European Stability at the Forefront of Gold Traders’ Minds

Spot Gold - $1,242.10 // $1.45 // 0.12%

We had the perfect fundamental driver for gold Wednesday; yet the commodity would follow the same general pace that the other capital markets would define. It is not particularly unusual that the precious metal would carve the same general level of activity as other, more speculative securities; but the event risk flooding today’s headlines was of the type that would be expected to influence this particular safe haven asset. Investors were keeping a close eye on the level of demand at the three-month lending facility auction from the ECB today. This was a preemptive move to secure liquidity for the European banking system ahead of the 12-month, Long-Term Refinancing Operation expiration tomorrow. Developed a year ago to secure liquidity for Euro-area banks, the program’s expiry will draw a massive 442 billion euros out of circulation. Acting as a necessary stopgap, the new and shorter-term facility was considered a loose gauge of the regions financial health. For this reason, the relatively modest 132 billion euros drawn would come across as a sign that banks were not in as bad a position as many had believed. However, skepticism held. This was still a large amount of support and tomorrow’s expiration will further curb lending and raise financing costs.

Another reason the liquidity auction wouldn’t spark a major bearish break from gold (which is testing the resiliency of its long-term rising trend) was the unexpected report that Moody’s had put Spain’s sovereign credit rating on watch for a downgrade. This is an event that could unnerve confidence in the region’s financial positions. Downgrades for larger EU members would further increase the strain on Europe’s foundation and more distinctly ensure a market-wide crisis. It is worth mentioning, that this warning comes just ahead of a planned 3.5 billion debt auction for the country. If this warning curbs demand, it would only further encourage the downgrade. Looking at activity behind gold futures, aggregate volume on the COMEX contracts is still very low. This is due to the market ultimately showing very little progress over the past month. At the same time, aggregate open interest is still exceptionally high as investors look to hold onto futures to gain exposure to future potential gains rather than invest in the physical at such rich levels.

Spot Silver - $18.61 // $0.12 // 0.62%

With little movement from either purely-speculative markets or safety-minded gold, silver would find little impetus to take up any major trends of its own. Net volume on the futures market is still relatively high but pulling back from Friday’s high. Open interest is dropping quickly however as the failed rally from gold to new record highs has curbed demand for a cheaper precious metal.

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