Crude Oil’s Descent Extends to a Fourth Session and Hints at a Potentially Critical Trend Reversal

North American Commodity Update

Commodities - Energy

Crude Oil’s Descent Extends to a Fourth Session and Hints at a Potentially Critical Trend Reversal

Crude Oil (LS NYMEX) -  $73.91  //  -$1.56 //  -2.07%

Crude fell for a fourth consecutive day through Monday’s US session, pushing the commodity to its worst trend since the mid-July plunge and marking the lowest close since October 13th. The real interest in price action however is the relationship to the descending trend channel that has developed since mid-October. While today’s plunge opens the way to more extensive declines going forward, price action is still generally confined to the well-defined channel. Whether oil is destined for a deeper retracement in the near-term or a bounce that maintains market stability will rest with fundamentals. And, while supply-and-demand fundamentals exact a consistent weight on the market; the impetus for volatility and trend will be sourced from risk appetite. While sentiment was still on the track set by Friday’s plunge, the intensity of the downdraft was significantly reduced (as can be seen with a nearly unchanged close for the Dow and a tame advance by the US dollar).

However, despite the measured progress made in other asset classes; crude would see a sharp decline through the day. Fundamentals would help play a role in the consistent trend. As liquidity returned to the market, oil would once again slip with various oil ministers from OPEC members voicing their opinion that the oligarchy would maintain production quotas when they convene in two weeks. Maintaining output trends means has its bullish implications for price as it means the group (which accounts for an estimated 35 percent of global production) will not attempt to supplement revenues lost on reduced prices by leveraging volume. However, most nations in the cooperative are already producing more than the agreed upon quotas. In the true scheme of supply and demand, it will have to be consumption that restores balance. Looking ahead to the US Department of Energy’s inventory numbers, crude stores are expected to have increased a more restrained 500,000 barrels in the week through December 4th (compared to the 2.091 million barrels reported in the previous week). Gauging demand from the world’s largest energy consumer, Federal Chairman Ben Bernanke took a cautious tone on growth going forward. Bernanke reiterated his warnings that there were “considerable headwinds” for growth while labor and credit trends would lead to a “moderate” expansion. This certainly does not provide the same explicit support for growth that last week’s NFPs figures.

Commodities - Metals

Gold’s Plunge Eases but Volatility Still Abnormally High as the Dollar Seeks Direction

Spot Gold  -  $1,153.80  //  -$7.60  //  -0.65%

Gold found its bearings at the opening of this week after suffering its sharpest one-day decline in a year this past Friday. Volatility was still tangibly elevated; but investors were taking a more rational approach rather than feeding the plunge. Taking stock of the ‘fear’ fear in the market, the CBOE’s Gold Volatility Index climbed above 30 percent intraday – its highest level since April 27th. Guidance for the precious metal is directly related to the bearings and intensity of the US dollar. The dollar index would carve a relatively wide range for the session but would not commit to clear follow through on last week’s surge. With last week’s reversal, two key characteristics of the commodity were undermined: its value as a high-yield asset and as a dollar hedge. A common headline in the financial media circles was the potential return on gold going forward when it is already near record highs. As the tangible security provides no yield (and actually comes with carry costs); capital appreciation is the sole source of return. With this in mind, when the average investor considers how volatile this asset truly is and the time with which it take to extend meaningful trends; it is difficult to justify keeping a large percentage of a portfolio in gold. As for gold’s third role (inflation hedge); Fed Chairman Bernanke said today that inflation would be subdued and would likely ease somewhat in the near-term. So, while the markets have shown a significant jump in interest rate expectations through the next 12 months since Friday’s data, investors are still largely in agreement with the Chairman that prices will be restrained through the first half of 2010 at least.

Spot Silver  -  $18.17  //  -$0.35 //  -1.89%

Silver fell for the third consecutive, active session Monday – setting the worst trend for the metal since the October 26th to 28th tumble. Drawing further comparisons to the tumble six weeks ago, silver ended its plunge after the third day of equivalent losses. This time around, the market is back upon a frequented and sturdy level of relative support around $18/ounce. Of course, if the broader investment sentiment once again falters and the dollar subsequently rallies, silver will likely surpass this floor. However, even if risk appetite once again stabilizes, the markets are still developing unfavorably. Aggregate volume on the most active futures contract has been cut to nearly half of its average two weeks ago. What’s more, open interest has been falling steadily since the beginning of November and it is starting to show through in speculative positioning in COT numbers.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com