Speculative Interests May have Shifted but Gold and Oil are Little Changed

North American Commodity Update

Commodities - Energy

Energy Traders Little Encouraged by Event Risk, Follow Technicals to an Oil Bounce

Crude Oil (LS Nymex) - $75.44 // $0.53 // 0.70%

As fundamental traders, it is still important to keep a close eye on technical patterns. During periods that speculative drive has leveled out or fundamental matters are exceptionally light, the self-fulfilling quality of these price patterns can often have an outsized influence on price action. This is the situation that we were presented with in the oil market today. The US market would print its first bullish close in six days – bringing to an end the worst bear wave since the open of July. That being said, the advance for the day was modest at best. This is partly due to the intraday pullback that followed a similar correction in other risk-sensitive asset classes. It is also a component of limited support for a bullish move from this particular market. There were a few favorable indicators for the day; but there is a lack of true fundamental drive to lead to a genuine reversal.

For fundamental drive today, the macroeconomic picture was offering much needed support for energy demand – but from second-tier sources. From the world’s largest energy consumer, the Conference Board reported an improvement in its Leading Economic Index composite with a 0.8 percent advance. Used to project growth trends in the coming three to six months, it is forgiven that the components of the reading were collected from June vintage. Speculation of fuel demand was further stoked in the world’s second largest energy user. Along with factory-level inflation and housing construction indicators, the US would release its July update for industrial production. According to the Federal Reserve’s statistics, manufacturing grew 1.0 percent last month to correct the modest contraction in the previous month. This data supports the notion that this particular sector is shouldering a disproportionate responsibility for growth in the country – an unsustainable situation.

Speculators would further take note today of the API inventory figures for a look at the other side of the supply-and-demand balance. According to the group, crude holdings surged 5.855 million barrels in the week through August 13th. It is further worth mentioning that the Cushing, Oklahoma (the regional grade used as the backdrop for the NYMEX contract) stockpiles contracted by 687,000 barrels. In reality, tomorrow’s DoE numbers have the real market-moving ability; but the week-to-week correlation between the two different measures is not exceptionally high. That being said, the expectations for a drop in crude holdings tomorrow to a one-month low are not necessarily out of the question. As for market-based activity today, volume on the liquid October futures contract hit a record 225,158 turnover and open interest marked its own historical high (the nearby September alternative is set to expiry on Friday). Also of interest, volatility in oil dropped for the first time in nine days – an interesting relationship to price.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Gold’s Rally Cools Directly after Notable Break as Convictions Behind Risk Trends Stabilize

Spot Gold - $1,224.85 // -$0.30 // -0.02%

Gold put in for its first bullish close in four sessions; but this negative close was hardly a test of the market’s three-week bull trend. The metal ended the day little changed after carving an exceptionally small range. This lack of activity stands in direct contrast to the level of price action in other key markets – like equities. The benchmark US indexes were up nearly two percent at the height of the day, suggesting a hearty move in risk appetite. Indeed, a strong move in investor optimism would be supported by the strong correlation between the various asset classes and the intensity of the pro-risk moves that they was established. The source of this optimism wasn’t a specific piece of event risk or fundamental development but rather a natural correction of last week’s big drop in the capital markets and subsequent withdrawal of capital. By virtue of the lack of conviction this would entail; the expected increase in risky assets is expected to be limited; and gold thereby will better weather the short-term volatility.

In the meantime, gold is showing little influence to short-term risk trends until a clear bearing on underlying investor flows is confirmed. The long-term outlook for economic activity was mixed in today’s data. In Asia, the growth in the Leading indicators index for China was offset by a significant deceleration in foreign direct investment trends. From the European session, German investor confidence dropped to a 16 month highs despite the remarkable reading for 2Q GDP. And, in the US, construction activity would offer little recovery hope from this vital sector. More specific to today’s brand of risk, the European debt auctions (Spain and Ireland) would alleviate concerns of an imminent financial crisis for two troubled EU members. Skepticism still stains this development though as the path to recovery is in years; and this reality will catch up to members well before this benefit sets in.

For speculators, today’s volume was exceptionally low. Turnover on the contract set to expire on December (the most liquid), turnover of 54,742 contracts is the lowest since July 23rd – and notably a good comparison to price action. With that in mind, the CBOE gold volatility index dropped to 17.4 percent today – its lowest reading since July 15th and just off a much more significant low.

Spot Silver - $18.52 // $0.12 // 0.65%

As a cheaper alternative to gold, silver has a greater speculative presence that often leverages its response to risk appetite trends. That sentiment played out nicely for the metal in price action today. A fourth consecutive daily advance was confirmed and the metal would actually mark its highest close since the first trading day of July. From the futures market, we can see liquidity rolling out of the September contract and into December at an accelerated pace. Aggregate open interest has started to turn higher as well and is at a July 1st high.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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