Crude Oil Prolongs it Worst Bear Trend in Five Months on Risk Aversion

North American Commodity Update

Commodities - Energy

Crude Oil Prolongs it Worst Bear Trend in Five Months on Risk Aversion

Crude Oil (LS NYMEX) -  $72.62  //  -$1.31 //  -1.77%

Crude fell for a fifth consecutive day Tuesday, extending the worst trend for the commodity since early July and measuring accumulating a 7.35 percent decline over the period. Looking for the impetus for such a discouraging trend; there was a considerable range of macro and market-specific data with which to work with; but sentiment proved to once again take the helm on the struggling asset. For traders in every risk sensitive asset; the top headline for the day was a warning from Moody’s that the United States and United Kingdom (two of the world’s largest economies) could test the stability of their Aaa sovereign credit ratings (the highest available. And, though the rating agency said it was unlikely that an actual downgrade was unlikely; an actual reduction to Greece’s national rating by Fitch as well as a reported second half loss from Dubai World’s real estate branch would offer a consistent outlook for inherent risk in the market. From the markets, those assets that purport capital returns on risk appetite would subsequently tumble and those that offer safe harbor from financial storms (like the US dollar) would rally.

If sentiment were not a factor today, fundamentals may have actually supported crude today. For supply-and-demand statistics, the weekly API data has set an impressive pace for Wednesday’s more market-moving DoE figures. According to the American Petroleum Institute, US crude inventories in the week through December 4th plunged 5.816 million barrels – the biggest drop since the period ending on September 5th. Considering the Bloomberg consensus for the government’s numbers tomorrow is calling for a comparatively restrained 250,000-barrel increase, there is potential for a significant surprise. In the meantime, the Department of Energy would release its December forecast figures. An outlook for the average price to hold around $78.67 is a modest increase from the $78.13 projected in the previous month; but the 2010 consumption figures would offer a little more to work with on a decrease in expectations for total fuel consumption of 0.2 percent to 96.78 million barrels a day. In macro news, the NIESR UK growth estimate for November reported positive growth for the first time since May of 2008; but this was offset by worst than expected activity in German and British factory activity.

Commodities - Metals

Gold’s Speculative Ties Overwhelm Sovereign Rating Concerns

Spot Gold  -  $1,128.40  //  -$29.70  //  -2.56%

Gold had attempted a recovery through the first half of Tuesday’s session; but a plunge through the afternoon hours of the US session would push the commodity to its lowest level in three weeks and worst three-day performance in nearly 14-months. Through the morning, the precious metal was attempting to find a bid through the news that Greece’s national credit rating had been lowered and both the US and UK were testing the “boundary” of their respective designations. For investors, this pressure would spell a direct threat to the government debt and currencies for those particular economies and subsequently increase the safety value of the commodity. However, gold’s current level and its potential for volatility must both be considered too great as traders would ultimately shun the asset in favor of the technically depressed US dollar. The greenback advanced 0.57 percent on a trade-weighted basis Wednesday and has climbed nearly 2.5 percent since last week. Just a month ago, the outcome of this mix of data would likely have sent the metal higher; but the potential for further returns on a speculative asset that is already pushing record highs is starting to be viewed as a contradiction in concept. For speculative interest the SPDR Gold Trust (the largest ETF backed by the precious metal) trimmed holdings by 13,72 tons or 1.2 percent to 1,116.25 tons. If central banks are indeed planning net purchases of gold going forward to diversify away from currencies like the dollar, this pullback should bolster interest.

Spot Silver  -  $17.59  //  -$0.60 //  -3.30%

Silver was suffering a significant drawdown of its own Tuesday – though its losses were more constrained than those of its more expensive counterpart. The commodity fell for the fourth consecutive day to push its losses to 8.6 percent – the largest correction since the October 28th pull-back. More importantly, the market is once again below $18/ounce – a critical level since October. The dollar’s advance was the most prominent catalyst to silver’s losses today. With the warning to the United State’s credit rating and a reported loss from one of Dubai World’s companies; a slump in risk appetite would weigh interest in the metals complex and leverage the safe haven appeal of the greenback.

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