Oil Extends Its Declines after a Report that Crude and Gas Inventories Ballooned Last Week

North American Commodity Update, Last Updated 10/28/2009 4:07 PM EST (GMT = EDT +4:00)

Commodities - Energy

Oil Extends Its Declines after a Report that Crude and Gas Inventories Ballooned Last Week

Crude Oil (WTI) -  $77.18  //  -$2.37  //  -2.98%

The fundamental pressure is building up against crude’s impressive run these past three weeks; and the market has taken the next step in a meaningful reversal. Pulling below the accepted support level of $78, the active futures contract is now forging near two-week lows and further encouraging speculative interest to book profits now and further fan the flames. Investor sentiment has broadly soured today with equities and commodities easing while the dollar recovers through its safe haven status. In this pullback, we will see how much impact risk appetite truly had in the oil’s (and broader market’s) rally these past weeks and months.

Supply and demand fundamentals offered an opportunity to stand in as a back stop to speculative flows today; but inventory data would end up feeding bearish sentiment. Yesterday afternoon, the API stockpiles report for last week offered a tentative, bullish outlook. According to the US industry group, crude stores plunged 3.532 million barrels and gasoline inventories dipped 255,000 barrels. Alone, this may have stalled the developing decline; but traders’ real interest was in the Energy Department numbers. In contrast to the API numbers, the DoE reported increases in both crude and gasoline inventories. Oil holdings rose 0.23 percent or 778,000 barrels (against a Dow Jones forecast of a 1.7 million); while gasoline stores unexpected rose 0.78 percent or 1.62 million barrels to halt the previous two weeks’ sharp declines. At the same time, demand for gasoline reportedly fell 92,000 barrels over the same period. This is further evidence that the glut of inventory floating in the market will not easily be absorbed given the current pace of US and global economic activity.

Aside, from the weekly supply data; the energy block was accounting for some earnings releases and OPEC commentary. From the corporate side, Conoco Phillips reported third quarter earnings that beat expectations while Petrochina said its revenue missed the market consensus. Both Iranian and Iraqi officials were offering marks that could have bolstered oil prices had inventory data not stole the scene. Iranian OPEC Governor Khatibi said in comments that current price levels would not harm the economic recovery and they could in fact rise further. He went on to suggest the higher price was a sign of better economic conditions, reversing the sense of cause and effect that many others have taken to the commodities appreciation. At the same time, after reporting national crude exports of 58.7 million barrels through September, Iraqi Oil Minister Hussein al-Shahristani said heating oil stocks were sufficient for the winter season.

Commodities - Metals

Gold Hits a Three-Week Low and Silver Maintains Bearish Momentum as the Dollar Strengthens

Spot Gold  -  $1027.50//  -$12.55  //  -1.21%

The reversal in metals is gaining momentum; but gold was looking at one of the more reserved losses among the precious metals group. While the popular commodity can attribute much of its rally this year to speculative interests in search of capital gains, gold is also considered an alternative safety currency. So, while the metal may lose ground against a more clear-cut reserve like the US dollar; it is still considered a better haven to financial storms than many other securities (like stocks, bond funds, etc). However, the heights that this asset has climbed against nearly every backdrop is hard to ignore. Should profit taking and risk aversion flows pick up steam, gold will certainly be one of the losers. In the meantime, the CBOE’s Gold Volatility Index stands at 20.6 percent – a relatively staid level compared to past weeks, but the frequency with which volatility has changed (a sign of surprise and instigation of large moves) is actually the most stable it has been since August. Concurrent with the developing reversal, the SPDR Gold Trust (the largest ETF backed by gold) reported holdings of the precious metal fell 1.22 tons a second consecutive day to 1,105.65 tons yesterday.

Spot Silver  -  $16.18  //  -$0.53  //  -3.17%

While gold has been able to dampen its losses, silver has taken to a third consecutive daily plunge. The cheaper precious metals doesn’t hold the safe haven appeal that its primary counterpart has maintained through countless generations; and the shift in sentiment has therefore has had a more acute impact on price action. With today’s performance, silver has developed its worst performance since the 17 percent, single-day plunge back on October 10th of last year. Tomorrow’s US GDP numbers will help to benchmark growth and could thereby redefine risk appetite.

-Written by John Kicklighter, Strategist
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