A Surge in Market Optimism Sweeps Oil Higher, Tempers Gold’s Advance

North American Commodity Update

Commodities - Energy

A Spark of Risk Appetite Throttles Oil Through Bloating Inventories, Questionable Data

Crude Oil (LS Nymex) - $73.99 // $2.07 // 2.88%

There was a blatant surge in investor sentiment across the capital markets Monday; and crude would certainly catch the bug of risk appetite. The nearly 3 percent rally from US-based oil was the biggest rally seen since the exhaustion of a month-long bull trend back on August 2nd. That being said, the rally wouldn’t offset the losses from the previous day now would it break the market from broader congestion. This same assessment can be attributed to nearly all the risk-sensitive assets. What does this say about today’s move? Volatility has been leveraged; but direction nonetheless remains elusive. While supply and demand are more important for crude, the responsibility for reviving trend will likely fall to investor appetite like most other markets.

In the meantime, the macroeconomic offerings on today’s calendar were meaningful enough to establish growth expectations – and thereby demand projections for the natural resource that fuels the economy. A bullish lean for the oil market began early in the Asian trading session Wednesday as the combination of far-stronger-than-expected Australia 2Q GDP reading and uptick in Chinese manufacturing helped prop up a quickly diminishing outlook for the global economy. The positive drift after this round of data wouldn’t gain proper traction until US liquidity picked up and data from the world’s largest economy crossed the wires. Though it has produced little impact on price action in recent months, the ISM manufacturing indicator proved one of the most effective catalysts we have seen from scheduled event risk in a while. An unexpected improvement in factory activity helps to maintain one of few remaining pillars of strength in the world’s largest economy. In truth, this only delays the inevitable cooling that lies ahead; but for now it is a development for which speculators are willing to respond to positive fundamentals. The other notable event risk specifically tailored to the energy market was the release of the weekly Department of Energy figures. The 3.435 million barrel increase in crude holdings beat expectations; but the really interesting statistics were in the details. Net petroleum holdings reportedly grew another 0.4 percent to another modern record of 1.14 billion barrels. Furthermore, refinery utilization dropped to 87 percent – the lowest level since April while total demand grew 0.4 percent to 19.6 million barrels per day.

US futures traders took special note of the 503,000 barrel drop in Cushing, Oklahoma holdings (to an April 23rd low of 35.8 million barrels) as the Nymex contract is based on the light sweet standard from this particular port. Furthermore, the active October contract reported a 371,652 share turnover while aggregate open interest rose to a June 16th high yesterday. Measuring risk, the one-year contango (premium difference between the active contract and one-year deferred) hit a May 20th high of $8.13.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Gold Loses Little Ground in Rebound for Risk Appetite

Spot Gold - $1,243.88 // -$3.58 // -0.29%

Following up on the impressive run from the previous trading day, gold tested a fresh two-month high Wednesday before retracing some of its gains. That being said, the turn in direction was hardly a more than a correction. In fact, the loss was very small and would not breach the rising trend channel that the market has carved since the end of July. The tempered price action from the precious metal (when compared to many of its liquid counterparts) speaks to its unique fundamental standing. A sizable rally in risk appetite would certainly undermine those financial and physical assets considered safe havens; and we did see gold react as would be expected. However, the progress made in the reversal was limited by the notion that this particular commodity is prized by investors for its unique status among other risk-stable securities, as well as their longer forecast horizon. So, while the boost in manufacturing activity from two of the world’s largest economies would leverage confidence in the speculative arena; the transient influence this data provides would shine through for gold bugs.

Posing a far greater threat/catalyst for the precious metal tomorrow is the ECB’s policy decision. Following the Federal Reserve’s decision to put a floor under its stimulus effort and start a program of Treasury purchases, the reality of long-term financial strain and the need for stimulus has become far more apparent to the masses. For this reason, traders will be more mentally invested in the European Central Bank’s unorthodox policy decisions. Should President Trichet maintain or enhance the programs for providing liquidity to the region’s banks or purchases of government debt, the market will take it as a sign that the global economy is growing increasingly dependent on a second round of stimulus (meaning the first round didn’t have the intended effects originally envisioned). Not only would this undermine confidence in the recovery and financial health; it acts to depreciate currencies and those assets that are denominated said fiat. When looking for a store of wealth that can weather such a market shift, gold is one of the assets that make the list. So, while I maintain that the metal makes a poor alternative currency; it nonetheless is one of the very few options out there and can continue to provide for desperate investors.

In the meantime, volume on active December contract would not top Tuesday’s impressive rally with turnover of 95,561 ‘shares.’ Open interest on this particular contract, however, would reach a record while the aggregate reading (encompassing holdings of all the tradable contracts) hit its highest level since July 6th. Another interesting note for the speculative crowd, volume in SPDR Gold Shares has held near its one-month average since late July (this is a good gauge for speculative interest for the underlying).

Spot Silver - $19.36 // -$0.01 // -0.19%

Compared to Tuesday’s massive run, the nearly unchanged performance from silver on the more recent session was a disappointment. The narrow range would still mark a fresh two-month high intraday though volume slipped to show lacking drive.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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