Crude Accelerates its Reversal on a Sharp Drop in Inventories, Jump in Consumption

North American Commodity Update

Commodities - Energy

Crude Accelerates its Reversal on a Sharp Drop in Inventories, Jump in Consumption

Crude Oil (LS NYMEX) -  $72.83  //  $2.14 //  3.03%

A rebound from the worst bear trend in eight years is bound to have some level of initial volatility and momentum; but oil’s rally through Wednesday’s US session was far more aggressive than warranted from a mere rebound. The active crude contract rallied 2.79 percent through the day for its most aggressive advance in a month – encouraged by a high impact inventory report. After the API reported a surprise 924,000-barrel increase in crude inventories Tuesday afternoon; the consensus forecast for the US Department of Energy’s figures for the same period seemed unjustifiable bearish. However, the 2.0 million barrel drop in stockpiles forecasted proved a better bearing than the industry group’s numbers. According to the government, oil inventories for the week ending December 11th tumbled 3.689 million barrels. This was a slightly smaller reduction than the previous week’s reading; but together, these two contractions represented the worst back-to-back since the September 4th and 11th reports. Historically, last week’s slump pulled total supplies to 332.4 million barrels – the lowest overall level since January 9th. Furthermore, imports of the commodity slowed to a level not seen since September of last year.  The only setback on the supply side was the fact that Cushing, Oklahoma-area stores actually rose for the seventh consecutive week (the NYMEX’s benchmark contract is based on the West-Texas Intermediate grade that is stored in this region).

However, in the broader scheme of things, supply is still well above the historical average; and to truly close the gap on fundamentals, demand will have to sop up the overhang and support the output levels that major energy producers have become accustomed to. On this front, the DoE’s weekly data was further supportive of the outlook. According to the report, total fuel consumption through the week jumped 6.7 percent to 19.6 million barrels per day. This was the biggest increase in demand in more than five years and lifted the overall level to its highest since August. Another highlight was the 14 percent surge in distillate demand – the most since February of 2008 to an eight month high. Outside the influence of inventory report, macro and political influences were also in play. Iran - already facing sanctions for its nuclear ambitions - riled international policy makers and traders when they successfully tested a medium-range missile. For long-term, underlying demand, the economic docket would raise the bar on projected consumption with strong readings from European manufacturing activity figures, UK employment data and US housing data. Now that we are back within the comfort zone that some OPEC members have defined (between $70 and $80), we will see where the market will go from here.



Commodities - Metals

Gold Advances as Dollar Stalls, Inflation Advances

Spot Gold  -  $1,137.90  //  $12.70 //  1.13%

Considering the slow chop that has developed after the beginning of the month reversal, it should not come as a surprise that gold’s advance through Wednesday was the largest in two weeks. However, the 1.1 percent rally was hardly the makings of a quick return to record highs for investors’ favorite trading vehicle. The precious metal is still over 7 percent off its high set on December 3rd; and it may take a considerable, fundamental event (or series of events) to polish the appeal of the already expensive commodity. For fundamentals today though, the advance was well founded. The primary catalyst for this market the past few weeks, the dollar, was offering little in the way of influence as the dollar stalled in its push to two-month highs. Against the euro, the greenback has found a significant hurdle in the 1.45 level. Moving down the line, risk appetite was an earlier supporter for the metal. Early strength in the European equities market would translate into a rally for the Dow on the open; but once again, 10,500 proved too significant a level to overcome on such staid sentiment trends. The real drive would end up coming from inflation. The US consumer-level inflation indicator reported the first annual growth in prices in nine months; and the 1.8 percent pace was certainly reason for concern when it comes to fears of hyperinflation developing from the extremely loose policies that governments and central banks are maintaining.

Spot Silver  -  $17.71 //  $0.29 //  1.67%

Silver advanced for the third consecutive session. Ultimate, this is the best trend for the more placid metal since the aggressive rally through November 18th. For fundamentals, demand for gold and the tempered dollar offered primary encouragement for bulls. However, in this tentative upturn; we have to defer to the depressed levels of aggregate volatility and open interest to really garner a sense of strength when it comes to bullish intentions and conviction.



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