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A Bull Trend Matures as Crude Moves on to $82 following NFPs

A Bull Trend Matures as Crude Moves on to $82 following NFPs

2010-03-05 21:34:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

A Bull Trend Matures as Crude Moves on to $82 following NFPs

Crude Oil (LS NYMEX) - $81.92 // $1.71 // 2.13%

Scheduled event risk was generally a disappointment for those seeking out volatility; but the data, combined with the stable backdrop of advancing risk appetite, would nonetheless push crude higher. A commodity of industrialization and speculation, oil extended its recently choppy trend to test yet another prominent, even number: $82. Aside from signifying the highest level for the commodity in nearly two months, this figure also has a history amongst speculators as the turning point for the October 21st peak and reversal. For technical traders, a stall and collapse from here would further a ‘head-and-shoulders’ formation. Otherwise, the distracted advance of the past month would not have to push much further to surmount 16-month highs at $84. Speculative interest is certainly carrying its weight when it comes to this securities appreciation. Matching general pace and bearing in the equities market, oil traders have seen their optimism fortified by the progress made towards buttressing the Greek economy and ensuring its financial troubles do not spread to the rest of the European Union and perhaps beyond. Additional austerity cuts from the government itself were a considerable gesture; but it was the nation’s ability to successfully raise funds that provided investors some level of confidence. Nonetheless, fear has not yet fully dissipated. Should the market doubt the EU’s resolve to lend whatever is necessary to bolster Greece or fear that troubles in Spain and Portugal could swamp effective rescue measures; the financial stability of the region could once again stoke anxiety.

For near-term speculative interest, the US labor data for February carried its own influence over this capital markets. From a speculative standpoint, the data would print close to the market’s forecasts. From a purely economic standpoint, the data would offer a modest boost to growth forecasts and thereby the outlook for energy demand. In fact, many commentators believe that had February snowstorms not been a factor, the month would have shown a net increase in payrolls. Nonetheless, putting this report into context, the world’s largest economy is still suffering from net job losses when the unemployment rate is already at 9.7 percent. Considering the subsequent influence this has on consumer spending, the outlook for a robust recovery that leverages energy demand is relatively mute. In the meantime, supply is still extraordinarily high. The increase in the Department of Energy’s crude oil inventory figures (extending the longest series of weekly increases since May) pushed US stockpiles to its highest level since August at 341.6 million barrel. It will be difficult to work off these excessive supplies and compensate for the slack capacity at refineries and further up the supply chain. Looking forward, the OPEC meeting on the 17th could provide a better assessment of production plans from the world’s largest collective supplier of petroleum productions.

0305crude 

Watch our weekly, live coverage of the DoE Inventory figures every Wednesday beginning at 10:15 AM EST.

Commodities - Metals

Gold’s Role as a Currency Alternative Negates Speculative Interest

Spot Gold - $1,136.73 // $4.53 // 0.40%

Despite the impressive strength in the Dow Jones Industrial Average and equities, in general gold would not enjoy a meaningful climb on its own through Friday’s close. Nonetheless, the week would close in the green. A more accurate contrast to the metal’s price action can be drawn to the US dollar. The benchmark currency would end the session relatively unchanged. In fact, the greenback has neither advanced nor retreated meaningfully in nearly a month. This divergence in correlation amongst these three important financial instruments speaks to the lack of resolve behind investor sentiment itself. Therefore, equities extend their impressive climb, this is likely founded on an influx of speculative capital rather than reflection of better balance for investing and returns. Further, perhaps the precious metal’s function as an alternative asset to recently weakened fiat currencies is negating a climb in risk appetite. A semblance of stability in Greece has taken the pressure off sovereign debt risk and financial uncertainty, indirectly tempering the value of the commodity. Looking for an objective reading on speculative interest and the demand for safety as it is measured in gold prices, the CBOE’s Gold Volatility Index dropped to its lowest level since late August today. Should stability rein, the market will once again have to decide where demand for gold will come from: risk appetite, an investment alternative, dollar hedge?

Spot Silver - $17.36 // $0.24 // 1.42%

Without the burden of a safe haven status or role as an alternative to fiat currency, silver provided a more direct response to the US dollar and risk appetite. The metal climbed for the seventh time in the past 8 days and subsequently post its strongest weekly advance since the first full week of the year. Looking at background market activity, delayed volume data on the COMEX futures exchange shows volume is still well off the highs establish last week – suggesting conviction is lacking even though price is rising. More interesting is the slow recovery in open interest on the futures market. Net open futures orders rose for another day from its recently set six-month lows to 118,000 contracts.

0305gold 

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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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