A Lack of Fundamental Drive Resolves Oil to Congestion, Breaks Gold Trend

North American Commodity Update

Commodities - Energy

Despite another Decline From Crude, the Commodity Essentially Unchanged

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

Volatility that is not accompanied by a consistent bearing is simply high-velocity chop. That is the general condition that most speculative based assets currently find themselves in. This is certainly the case with crude, which has maintained an approximate $5 range for the past four weeks. Hopes were high that this would be the week that speculators would be able to revive a trend for the market (bullish or bearish) as trading desks filled out after the extended US holiday ended and the summer doldrums came to a close. However, as is now obvious, the mere presence of more investors and traders does not guarantee a greater magnitude of price development. For oil, the boundaries of technical congestion are clear between a range high and 100-day moving average at $76 and extended series of lows down at $71. With these levels in mind, we look for the catalyst for the overdue break.

The rise and fall of risk appetite has the greatest potential over the energy market – just as surely as it can define price action for every other asset. At the same time, aimlessness in speculative interests could unduly anchor oil when other fundamental developments are taking place. This is the case presently. Risk appetite trends failed to gain traction with big global themes (like a European financial crisis, China’s overextended credit position and slowing growth for the US) finding more evidence of further speculation rather than any certainty. In the meantime, the macroeconomic developments for supply and demand remain in flux. From the docket, trade activity was in focus. An essential measure for activity levels for individual economies, this data can further be used to judge energy demands through imports and exports between suppliers and consumers of the vital resources. With this in mind, the record deficit for the UK was discouraging; but the rebalancing between the US and China helps alleviate critic trade pressure. On the other side of the coin, we would receive another update on the supply side of the market. Delayed a day due to the Labor Day holiday, the DoE’s weekly inventory figures showed a 1.85 million barrel drop in stockpiles to 359.8 million barrels. However, the data would actually come out bearish overall with net petroleum holdings hitting another record 1.15 billion barrels.

With another day of moderate volatility and an overall lack of direction, speculative interest was once again tame. Volume on the active October Nymex contract was slightly offer yesterday’s level with 337,949 in turnover. It is further interesting to note that the market is already rolling forward to the November contract despite its predecessor’s expiration still well off in the future. Elsewhere, the absence of an imminent threat has led the two-year contango (difference between the nearby and two-year deferred contract) slipped again from its recent record to $10.42; while the CBOE’s volatility index hit a new month low of 31.8 percent.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Gold Finally Marks a Move Outside of its Slow and Steady Bull Trend

Spot Gold - $1,243.65 // -$11.30 // -0.90%

Though gold essentially runs on its own fundamental tracks (the regular back and forth in more sensitive asset classes has comparatively little impact with this commodity), it is nonetheless dependent on uncertainty to fuel its consistent trend. After six weeks of a preternaturally consistent climb and coming into close proximity to a new record high, the bull run finally hit a snag. Through Thursday’s session, spot gold put in for its biggest daily decline since July 27th (the exhaustion move that preceded the upswing) and subsequently pushed through the technical floor of the steady move. It is worth mentioning that the backbone to this remarkable trend is hard to quantitatively assess; but considering this is such a steady and slow-paced move, the correction is amplified to all those that were watching.

Why did this safe haven correct when risk appetite trends were otherwise tame – specifically because they were tame. In the past month, growth and yield-sensitive markets haven’t been able to establish a clear trend to support either investment bulls or bears. This has kept these other assets stationary; but gold has maintained its bearing. Eventually, the appreciation will naturally hit its limits as the capital flow is stymied until market participants are once again encouraged to seek out a harbor for their wealth that stands outside the high correlations and fickle influence of risk appetite. With costs rising on this safe haven (the metal is just off a record high), traders are a little more deliberate in their holdings. That being said, there is still plenty of evidence of uncertainty in the market. Data from the Bank of Greece shows the nation’s banks are still borrowing near-record amounts of capital from the ECB. China moved up the release of its scheduled event risk, leading market participants to speculate an impending rate hike announcement. And, the consensus for a stalled US recovery is solidifying. Despite all this, the market still needs something tangible to react to that can be definitively interpreted as a deterioration in market and economic conditions.

Looking at the activity levels behind today’s technical correction, there is also reason to doubt that a major trend is upon us. From the activity December Comex futures contract, 111,867 turnover does not indicate an elevated level of activity that would be indicative of a reversal. The same can be said of the 13.747 shares traded on the SPDR Gold Trust fund. To further drive the point of uncertainty home, the CBOE’s Gold volatility gauge actually touched an intraday four-month low of 17.03 percent.

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

Silver would put in for yet another two-year-plus high Thursday. This steady climb looks to be borrowing more from its own particular momentum rather than deferring to the fundamental developments and capital shifts in related asset classes. Indeed, gold would put in for a significant loss and equities (as a proxy for the more speculatively influenced markets) were little changed. Don’t expect this deviation to hold up for long however as turnover has not been ramped up along with underlying price action.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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