North American Commodity Update
Commodities - Energy
A Correction in Capital Markets Keeps Crude Under Wraps
Crude Oil (LS Nymex) - $73.79 // -$0.51 // -0.68%
US-based oil fell for the third consecutive active session at the official open to the trading week Tuesday. However, unlike many of its risk-sensitive counterparts, crude was would mark relatively reserved bearish progress through close of the day’s electronic session. In fact, the commodity was ultimately little changed through the close after carving a wide range and tracking equities aggressively lower through the early hours of the New York session open. A comparison between the energy and equities markets’ intraday price action shows that the selling pressure behind risk aversion maintained momentum only through the European session and into the opening hours of US liquidity. A quick turn to stability in underlying sentiment trend shortly after the NYSE opened for trade would expose oil to its own fundamental influences – manipulation that would bolster the market.
One of the interesting aspects of the energy market is the influence that the production and supply chains have on price – for better or worse. Recently, the glut in inventories across the board has kept the constant pressure on the raw material (crude) down to the refined (gasoline). Today, however, this relationship reversed course when an explosion at a Mexican refinery bolstered prices and created a price push down the line. This is admittedly a moderate and likely transient influence; but when speculative interests balance out, the changing fundamental pressures can expose unusual drivers. Aside from this particular development, the macroeconomic docket was relatively light. For the energy traders, the German factory orders report could be directly traced back to the supply/demand debate that defines oil’s fair value. The 2.2 percent drop in demand was the biggest decline since February 2009. This is a notable reading considering Germany is one of Europe’s largest manufacturing economies.
Looking ahead to tomorrow, the scheduled event risk will pick up somewhat. Setting aside the fickle changes in risk appetite trends, the calendar will provide industrial production readings from both German and the UK. Gauging the current level of factory activity and forecasting output levels going forward is essential to establishing how much energy is needed to fuel this growth. Perhaps more interesting to the increasingly global-cut of energy trader though is the US data: Fed Beige Book and consumer credit. The former is the central bank’s assessment of economic activity and the latter is a valuable reading of consumption.
For the savvy speculator, the increase in the future market’s contango (difference between the current and a deferred contract) should draw interest. The two-year differential is at its highest level on recent record at $11.34 and the six month spread has doubled in a little over a month to $5.75. This is both a sign of front-ended risk and expectations of growth later down the line.
Crude Futures Chart (Daily)
Chart generated usingFXCM Strategy Trader
Commodities - Metals
US Session Close for Gold is Market’s Highest on Record, Though Momentum is Still Lacking
Spot Gold - $1,255.55 // $5.50 // 0.44%
On a day that risk aversion was the dominant development, it should come as little surprise that gold was advancing. In fact, precious metal’s benchmark futures contract would actually mark its highest close on record through Tuesday’s close on the Comex market - though bulls have yet to set an intraday high to complete the picture. If we look at the progress made on the day, we see the foundation for both strength and restraint. On the one hand, we have a record high close; but on the other, the market has not amplified its otherwise stable and consistent bull trend channel. This suggests a greater interest from investment capital rather than speculative flows that are shifted by indecisive market participants looking for quick capital gains. Such a backing is encouraging as it means a continued advance is less precarious than it would be otherwise. That being said, the longer this six week trend maintains its bearing and pace, the more likely a break and reversal is. Consistency is an unnatural state for any free market.
As for fundamental influences Tuesday, the slip in market-wide risk appetite certainly contributed to price action. Rather than following the pace that equities and other highly volatile asset classes would carve though; gold bugs were likely more interested in the backdrop for today’s fundamental concern. A renewed focus on Europe’s financials would find a target that was especially exposed to skepticism. Suggestions that the stress test from the EU a month ago didn’t properly account for risk, an inability to agree on long-term fixes to fiscal management across the boarders and national strikes were all significant stories for the day. However, none of these issues is particularly surprising. In fact, we have seen all these issues in one form or another repeatedly over the past months; but so is the ever-changing attention of the speculative masses. Unless confidence in this region further deteriorates in tomorrow, this run could stall or reverse (though gold is fundamentally stable enough to survive a moderate blowback). Tomorrow, interest will be focused on a few scheduled events. The Fed Beige book and consumer credit are important updates for growth and financial stability in the world’s largest economy.
Looking for market positioning, it should be noted that the December futures contract was moderating (93,789 contracts) despite the level of price. Furthermore, aggregate volume is still exceptionally low at 117,041 contracts compared to the jump in interest during the late-July reversal (hitting 424,316 back on the 25th of the month). Furthermore, the backdrop for speculative interest is still very tame with the proxy SPDR Gold Trust turnover reporting volume of 8.781 million shares and resistance at 123.00/50.
Spot Silver - $19.78 // -$0.06 // -0.30%
Silver would contract for the second consecutive trading session; but there was virtually no progress made. This is similar in nature to gold whereby the market would move but no major levels would be breached to establish a new trend. The speculative interests behind this market were clearly stepping in here. As for trader interest, volume on the December contract rose a third straight day.
Spot Gold Chart (Daily)
Chart generated usingFXCM Strategy Trader
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Written by John Kicklighter, Strategist
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