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North American Commodity Update

Commodities - Energy

A Deterioration in Economic Activity, Financial Stability Curbs Crude’s Bullish Endeavors

Crude Oil (LS NYMEX) - $75.84 // -$2.01 // -2.51%

There was plenty for energy traders to take in Wednesday; and little of it was good for the growth and sentiment-dependent crude market. A day after benchmark NYMEX rolled over to the August futures contract as the active nearby, we have seen the commodity take a remarkable dive. For the individual contract, volume rose to a new record of 347,000 contracts turnover; but both aggregative volume and open interest continue to slide as the market seems to lose conviction in its drive. This background market activity however is not as interesting as price action itself. Calling an end to a week of sideways price action, the market is now in danger of retracing the gains made through June. To confirm an intention to push oil lower, bears will next have to push the market below $75. If another round of fundamental activity akin to today’s headlines is set for tomorrow, the next step in a trend reversal should not be difficult to accomplish.

From a purely speculative position, global investors would move away from risky assets that offer little or no yield after European finances came back into focus. Bond yields and credit default swap premiums jump amongst European Union countries Wednesday after a Portuguese 5-year debt auction drew a 4.657 percent yield that was far greater than the last sale in late May. Adding to this discouraging scenario, Moody’s reported that Greek banks borrowed 89.4 billion euros from the ECB in the form of repurchasing agreements while Portuguese firms nearly doubled their borrowing from the central bank with a 35.8 billion draw. What does all this mean? Financing is the European region – one of the world’s largest collective economies – is withering and pushing the region closer to a full-blown crisis.

As for supply-and-demand fundamentals, the European and North American dockets would curb expectations for a robust global recovery that would feed energy consumption. The top event risk for mainland Europe was the release of the June PMI activity indicators for France, Germany and the broader Euro Zone. These are specifically a reflection of the business sector yet are often treated as a timely proxy for wider economic activity. If there is any truth behind this fundamental link, the outlook dimmed a little with the second consecutive decline in the composite figures for the month. When the sessions rolled over, the Canada and American data was similarly discouraging. Canadian retail sales marked its sharpest decline in 16 months (a similar performance when excluding autos); and US new home sales collapsed by 33 percent along with the expiration of a federal tax incentive. Clearly conditions are not as fair as were predicted earlier in the year.

Another component to today’s slide in crude prices was the weekly Department of Energy inventory figures. Crude holdings reportedly grew 2.02 million barrels to 366.1 million barrels in the period ending June 18th. On the other side of the equation, demand for gasoline slipped 1 percent to 9.24 million barrels – the first contraction since May 14th. The long-term implications of today’s develops seems to be minimal however given the modest change in the premium differential between the active futures contract and two-year deferred ($6.91).

COM-10-06-23-01

Commodities - Metals

Safe Haven Gold Slips Despite a Swell in European Financial Trouble, A Slump in Fundamentals

Spot Gold - $1,237.35 // -$2.70 // -0.22%

Gold would recover from an early morning stumble Wednesday as global investors (those using the precious metal as a component of a broader portfolio) worked out the assessment of risk appetite for the day. Over a couple hours in the early US session, the metal collapsed 1.8 percent ($21.80) to threaten a much more prolific trend reversal. However, the rising trend that has been in place since late March would ultimately hold its ground with a subsequent recovery through the afternoon trading hours as sentiment cooled and no clear direction in the major markets would emerge. Helping to confirm the day would not progress into a breakout or major trend reversal; the COMEX futures exchange’s active August gold contract would see volume and open interest levels that fell in line with the general levels of the past month – and on an aggregate basis, the activity level is well below the previous month’s average.

The lack of activity on the day may not be particularly surprising; but the direction certainly is. Top scheduled and exogenous event risk for the day certainly dampened the outlook for risk. The tight spot that Europe’s financial markets were in seemed to further constrict with evidence that credit conditions are starting to freeze. Demand at Portugal’s five-year note debt auction was not as important as the yield that the country drew. The country is now financing at just below 5 percent. These are levels that are not likely sustainable given the expected drop in tax revenues going forward and the sheer amount of debt that needs to be rolled over. Along similar lines, both Portuguese and Greek banks seem to be increasing their borrowing habits from the ECB; suggesting the market’s are closing off to private firms and forcing the economy into a severe credit drought – a scenario often followed by crisis.

On the other hand, the view of fiscal health the world over still seems to be on a path of improvement. According to a Bloomberg article this morning, Japanese lenders are expected to increase loans and help encourage economic expansion and perhaps even inflation. Rounding out a strong report card for the UK, Moody’s weighed in on the budget report and remarked that it was certainly “supportive” for keeping the nation’s top AAA rating. Under these conditions, the threat of a major sovereign credit downgrade is pushed back; and thereby the value of the safe haven metal is diminished slightly. Yet, these developments are not dramatic enough to fundamentally shift the need for safety.

Spot Silver - $18.53 // -$0.29 // -1.52%

While neither gold nor equities provided a strong trend to work with (at least not through the entire trading session), there was a clear bearish bias for both the metal and speculative assets. This is a discouraging combination for a commodity that splits its loyalties between a cheap alternative to a safe haven metal and as a speculative asset in its own right. The active, July COMEX futures contract continues to bleed open interest as traders move out to distant expiries; but aggregate open interest continues its push to seven-month highs as market participants attempt to place their metal positions in a cheaper alternative.

COM-10-06-23-02

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