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How Bullish is a Crude Advance that is Derived from the Weakest Level of Activity since 2007?

How Bullish is a Crude Advance that is Derived from the Weakest Level of Activity since 2007?

2010-03-12 00:49:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

Crude Oil (LS NYMEX) - $82.11 // $0.02 // 0.02%

Though it has been small consolation to traders, setting fresh eight-weeks high has imbued crude with a sense of activity. However, removing this moderate accomplishment (besides, $84 is a far greater level when it comes to psychological weight), we are left with a notable bullish bias that has directed the market for nearly five weeks now. However, even this is marred by the lack of momentum and general activity that characterizes speculators interest. In fact, the look at volume on the NYMEX for the active WTI futures contract shows today’s turnover of approximately 249,000 contracts is the lowest reading on activity since before the last contract rollover. Moreover, an assessment of the running 20-day average true range reveals activity in this commodity is at its lowest level since September of 2007. On the one hand, this speaks to a market that is directionless when it comes to risk appetite and utility return on relative asset classes. Yet, as the same time, such an extreme also suggests a reversion to a mean. What is the mean? An increase in volatility. And, an increase in activity significantly increases the probability of a new trend.

There was plenty of scheduled event risk to cross the wires this morning and alter investors’ perception of future supply-and-demand in the energy market. Though, little of it would actually feed through into price action. Early in the day, China (the world’s second largest energy consumer) reported a remarkable increase in industrial production, retail sale and lending. All told, this points to a robust demand for the fuel to keep such a trend up. However, market participants are well aware of officials’ desire to cool economic activity in the economy and prevent a disastrous implosion of burgeoning asset bubble. In the US, trade data seemed to show an improved balance; but a drop in imports actually speaks to a drop in demand. Particularly discouraging for oil traders was the fact that crude imports fell to its lowest level in a decade. Perhaps Friday’s data can offer a clearer draw on direction and pace. The combination of retail sales and the University of Michigan’s consumer confidence survey will offer a good assessment of health for the economy’s largest donor to output. And, keeping track of the quantifiable reads for supply and demand, it is important to repeat the trends (not the weekly changes) for this past week’s readings. US crude inventories have grown for the longest period since May to 353 million barrels – itself an August high. At the same time, OPEC upgraded its global consumption forecast by 190,000 barrels to a rate of 28.94 million per day

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

A Stalled Dollar and Equities Keep Gold Buffered to Risk and Safe Haven Appeal

Spot Gold - $1,109.50 // $1.09 // 0.10%

Gold ran through all of the good will that its speculative facet could muster. Like the Dow Jones Industrial Average, US dollar and crude; this commodity has reached a level that has sapped conviction of trend and forced traders to evaluate their confidence of a global bull-market. However, where there are clear technical boundaries (like a yearly swing high for the Dow or congestion band on EURUSD) there are few definitive levels for the yellow metal. The same inelegant pace and circumstances are mirrored for the fundamental factors that account for price action. For its appeal as a speculative asset, the metal has seen little impetus one way or the other from other benchmarks for risk appetite. Given the dollar’s stability over the past month, there is little movement coming from the commodity’s status as a hedge to this deeply liquid currency. If there is a ‘hedge’ aspect that really develops for this popular asset, it will be as an alternative store of wealth to fiat currency itself. Ballooning government deficits, limited growth projections and inflation threats all work to diminish the appeal of paper money. However, in the short-term, gold bugs’ eyes remain on the speculative front.

Spot Silver - $17.17 // $0.15 // 0.88%

Silver cut a very restrained range Thursday; but an intraday, bullish reversal would prevent a seven-day low from turning into a true bear wave. Congestion has notably taken over for the metal and threatens to fully offset the bullish momentum the market has enjoyed since the beginning of February. However, with speculative-linked benchmarks like the Dow running into overhead resistance, there is little in the way of a fundamental crosswind for the silver to move on. Looking to the US dollar, there is certainly little impetus to come through that normally active link given the currency’s long-term congestion.

Commodities_031110_3

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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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