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Can Crude Break Pull Up From its Worst Trend in Six Years?

While momentum may have flagged somewhat into the end of the week, crude’s trend is still startlingly clear. The commodity is heading for its eighth consecutive daily loss and thereby ushering in the worst trend the market has seen in six years.

North American Commodity Update

Commodities - Energy

Can Crude Break Pull Up From its Worst Trend in Six Years?

Crude Oil (LS NYMEX) -  $70.11  //  -$0.43 //  -0.61%

While momentum may have flagged somewhat into the end of the week, crude’s trend is still startlingly clear. The commodity is heading for its eighth consecutive daily loss and thereby ushering in the worst trend the market has seen in six years. What’s more, this sharp selloff cannot be minimized as a short-lived correction. The sudden leverage in volatility merely amplifies a bias that has been in development since the market hit its late-October swing high. From the swing high marked eight weeks ago, oil has retraced a significant 15 percent. While sentiment is responsible for the recent intensity for selling pressure; underlying fundamentals are showing a greater prominence when it comes to consistency of trend – and normal supply-and-demand concerns may even garner a greater impact on short-term volatility should risk appetite further balance. This past week’s inventory numbers have shown that week-to-week fluctuations do not carry as much weight as the overall trend – speaking to the still hefty discrepancy between supply and expected consumption. Crude stockpiles in the week through December 4th fell 3.823 million barrels; but the overall level is still 7.2 percent above the five year average for the period. Furthermore, holdings in the Cushing, Oklahoma region (where the WTI grade that is traded on the NYMEX is stored) surged 8 percent in the same period to its highest level since early August.

According to headlines today, the outlook for a rebalancing of this fuel overhang is far off. According to the International Energy Agency, OPEC has achieved 58 percent of its production cuts laid out for November versus 60 percent the previous month. Output from the 11 nations with quotas grew by 90,000 barrels per day to 26.61 million barrels. Looking ahead to the production meeting on December 22nd, officials from the individual economies have consistently voiced their predictions that production levels will not be changed. On the other hand, there are encouraging signs that demand may be slowly recovering from the depressed levels established by the recession. Today, China reported industrial production grew 10.3 percent in the year through November and retail sales expanded 15.8 percent in the same period. The largest consumer, the US, reported a monthly increase in retail sales 1.3 percent and a near two-year high in consumer confidence. However, these factors are likely to play out over time. Next week’s price action will likely once again fall to speculative interests. At least a temporary bounce in crude is a high probability in the opening days of the week. Whether a bounce turns to a meaningful reversal though depends on the underlying direction in risk appetite. Should the Dow break from congestion, it would likely drag the commodity with it. It is interesting to note though that weekly futures volume though the past week hit a record high of 2.011 million contracts through the decline.

Commodities - Metals

Gold Plunges a Monthly Low Following an Impromptu Dollar Rally

Spot Gold  -  $1,116.30  //  -$14.70 //  -1.30%

Gold was forced out of congestion and into another aggressive, short-term decline Friday by an unexpected surge in the US dollar. The dollar index (trade-weighted) pushed to its highest level since November 3rd in an extension of the bullish reversal that began early last week. The correlation between the greenback’s strength and gold’s weakness offers a clear view of which role (dollar-hedge, inflation-head, high-return asset) is most important at the moment. Underlying sentiment was positive, but comparatively reserved. Equities advanced for the third consecutive session. Inflation expectations also received a boost on the day. The US Import Price Index rose expanded on an annual basis for the first time in 13-months and the inflation-adjusted TIPs index measured by iShares stalled in its biggest, bearish correction since April. All told, the speculative interest in the metal versus the US dollar shows the primary drive for the session. Whether risk appetite holds its prominence into next week (and whether other factors aid or hinder sentiment) remains to be seen. It is interesting to note, however, that this past week, the Bank of Korea labeled gold’s strength an “illusion” and said it was not looking to take on more inventory. Though a relatively small player among the central banking group, it is a strong and unambiguous signal from one of the very few groups that can maintain a gold advance at record highs.

Spot Silver  -  $17.04  //  -$0.37 //  -2.13%

Silver marked another sharp decline through Friday’s session. This ratcheted up the tally to six bearish sessions in the past seven active trading days – the worst trend since the correction through June and into mid-July. From peak to trough, the precious metal has plunged over 13 percent from the 16-month high set before the most recent plunge. The fundamental drive for the day would come from the strength of the US dollar that would invariably drive most of the more speculative commodities lower. In fact, the greenback’s influence on silver (like with gold) is significant enough to overwhelm the mild rise in risk appetite that has developed in the second half of the week. If sentiment slips next week, the market’s bias already presents a scenario for a much more aggressive retracement.

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

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