Crude Postures for a Breakout but Gold Needs Momentum for Record Highs

North American Commodity Update

Commodities - Energy

A Bounce in Risk Appetite Leads to the First Oil Advance in Four Days but Conviction Clearly Lacking

Crude Oil (LS Nymex) - $73.79 // -$0.51 // -0.68%

US-based crude advanced for the first time in four sessions. Volatility from Wednesday’s session was more or less in line with the previous three active trading days (not saying much considering price action was distorted by holiday conditions). Yet, there was a distinct contrast to draw in that there was at least a consistent advance for the commodity through the close. Despite this appreciation, though, the commodity actually retains the idle qualities of the congestion that has developed over the past three or four weeks. Until the market can push prices above $75.50 or below $71, the market will simply find itself churning water.

As for today’s fundamental encouragement, the energy sector was following the same course laid out before equities and other growth-sensitive assets. Sentiment was buoyed by a simple shift in concern from the previous session. On Tuesday, as volatility recovered, the return of the speculative crowd (back from summer vacation and an extended holiday weekend) were hone in a ‘big theme’ fundamental driver. With the financial press already running stories on the legitimacy of Europe’s financial and economic recovery; investors would natural adopt the concern. That being said, none of the stories were exactly novel; so the impact would be naturally limiting unless panic built up its own momentum. As we can see, fear would not be self-generating; and today’s market response would be a rebound from yesterday’s losses.

With speculative interests accounted for, it is important to further note that regular supply and demand fundamentals would also come into play. The late-session release of the Fed Beige book would temper the bullish mood with a general assessment that there were “widespread signs of decelerating” activity. This is a conclusion that the capital markets had long-ago reached. Therefore, this particular reading wouldn’t significantly offset the bullish news released earlier in the day. Of note, the UK, Canada and Germany would all report an increase in factory activity – a positive sign for demand and general growth. Furthermore, the API’s weekly inventory figures reported a massive 7.3 million barrel drop in stockpiles (putting tomorrow’s projected 1 million barrel increase from the DoE in the spotlight). That being said, the US Energy Department today lowered its projection for average crude prices through 2010 from $79.13 to $77.37; and a MasterCard metric reported consumer demand for gasoline dropped to a six month low.

Looking at speculative turnover, the October Nymex crude futures contract reported volatility that was a slight dip from yesterday (326,803 contracts). Furthermore, the two-year contango ticked up from its record low to $10.93.

Crude Futures Chart (Daily)

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Commodities - Metals

Speculators Short Attention Span May have Shifted but Gold is Still Buoyant on Europe’s Uncertain Future

Spot Gold - $1,254.95 // -$0.60 // -0.05%

A 0.05 percent change on the day should clue us in to the general sentiment for the day. With the very slight change between open and close, spot gold actually carve a range that matched the activity of the past six weeks. And, with the intraday high, we would see a new two-month high that was approximately $6 off the record high set back in June 21st. The precious metal is still locked in its extraordinarily-consistent bull trend; but the lack of day-to-day progress over the past few weeks suggests there may be trouble with forging new highs on a consistent basis (the technical punch of just marking a record high from the market’s current position shouldn’t be difficult at all). Where gold heads from here, and the pace it takes, will be dependent on risk investor confidence. Today, the backdrop for market sentiment was simply a correction of the previous day’s risk aversion move. As a safe haven, the metal would certainly feel the pinch; but the impact was certainly mitigated by the stability of average gold investor.

Yesterday, the focus on Europe’s financial troubles would cater to exactly the sovereign and structural uncertainties that have kept risk capital flowing into the precious metal. And, even though this topic slipped from the headlines Wednesday; the hazards that are attached to this general strain have not intensified or eased at all. Those monitoring long-term trends are well-aware of this fact; and kept their market bearing through their long-gold exposure. In fact, the Fed’s Beige Book may have even furthered the level of uncertainty surrounding the global economy and market’s future. Representing the world’s largest economy, the central bank economic assessment was summed up with the opinion that there were now “widespread signs of a deceleration” in the recovery. Not exactly a shock; but admission from policy authorities makes it a more tangible reality – especially for those passive investors that do not follow the ebb and flow of the speculative crowd. Looking ahead to tomorrow, the general level of risk will be developed by both scheduled and exogenous events. From the docket, expect market participants to be particularly interested in the Bank of England’s monetary policy decision.

For a speculative reflection on of the gold market, we look to the CBOE’s volatility index for the precious metal. The indicator is bouncing along lows that mark the lowest level of activity since records began (it is currently standing at 17.9 percent). This seems fitting given the moderate progress made but contradicatory to the proximity of record highs. Elsewhere, we see that that aggregate volatility on the futures market is holding stable near the depressed level of its monthly average at 101,000 – though overall open interest is still at its highest level since July 1st.

Spot Silver - $19.91 // $0.13 // 0.63%

It seems silver traders are treating the metal as safe haven or speculative asset depending on which best benefits the market’s bullish bearing. Despite the reserved pace of equities and modest decline in gold, silver would still post a strong advance for the day. Notching its highest reading since March of 2008, the commodity has a clear bearing. As for the backdrop of speculative interest in this move; the December Comex futures contract reported 29,575 share turnover for the day.

Spot Gold Chart (Daily)

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Written by John Kicklighter, Strategist

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