North American Commodity Update
Commodities - Energy
Crude Oil (LS NYMEX) - $81.21 // -$0.90 // -1.10%
Volatility perked up modestly for the active NYMEX crude contract Friday such that the market would test a new eight-week high of $83.16 before reversing course and potentially forging a bearish breakout. With the week’s close pulling the market below a trendline that has guided the commodity upward for over a month now, a speculative barrier has been removed. What is needed now is momentum; and such conviction will likely come through risk appetite itself. As it stands, the market’s level of activity (measured through the rolling 20-day average daily range) is still near its lowest level since September of 2007. However, the CFTC’s Commitment of Traders figures reported a 17,897-contract increase in net long speculative positioning through the period ending March 9th. Furthermore, aggregate open interest for the commodity on New York futures exchange has steadily climbed to its highest level since June of 2008. Interest is building; but market participants are awaiting a clear bearing before committing. Therefore, the end-of-the-week break that is so clear on the chart must still be considered a tentative move; because risk appetite was ultimately little moved through the session and the US dollar
actually tumbled itself (the commodity and currency often move inversely due as the dollar is oil’s primary pricing instrument).
Ultimately, when the next solid trend does form, it will likely follow wherever investor sentiment leads. However, risk appetite itself has significant fundamental pressure from economic data on the backend. Specifically, should fear and uncertainty take over, there is more than enough reason to unwind speculative positioning. Today, the headline macro data was somewhat mixed. Retail spending in the world’s largest economy rose 0.3 percent against speculation of a contraction. On the other hand, the University of Michigan consumer confidence report unexpectedly eased back from a two-year high. These changes were relatively modest and do not definitively alter their respective trends of improvement. Taking a broader look at demand, the International Energy Agency revised its forecast for global oil demand for the year by 70,000 barrels to 86.6 million barrels per day. Further noteworthy in this release was the 1.7 million barrel increase to emerging market consumption to 41.2 million barrels per day. Economic expansion across the globe has developed more clearly outside the developed bloc; and top amongst this group is China, which is also the second largest consumer of fuel in the world. This is a link that will certainly not be overlooked going forward as the Chinese government attempts to cool its markets and economy to avoid a potential asset bubble. And, through this economic link, we loop once again back to the influence risk appetite has on the market as sentiment has so far held up despite building pressure for policy makers in the economy to act upon.
Commodities - Metals
Gold Extends its Decline Alongside the US dollar and Risk Appetite
Spot Gold - $1,102.11 // -$7.39 // -0.67%
It was an unusual end to the week for gold bugs. Through the close, the risk appetite was little changed while the US dollar was tumbling ; and yet, the precious metal was also on the decline. This is an unusual mix considering gold’s two most elemental roles in the financial market through recent history were as a speculative instrument and dollar-hedge. This divergence is most likely the mix of two key developments. The first consideration that market activity itself has become so stagnant that the correlation that has bound these markets together is loosening. A second issue is the deterioration of fundamentals in the background (despite the relatively stable condition of other growth-sensitive markets). Concerns about the stability of the Euro
Zone, financial stability of China and sovereign credit ratings of the world’s largest players have all increased with time. So, while this metal has a value through its function as a safe haven by acting as an alternative to fiat currency; it could be considered too expensive and volatile to reliably play the role of a clear hedge. Looking at speculative interest, the COT report revealed speculators increased their long exposure on the COMEX by 822 contracts on to a net 208,194 contacts. At the same time, the delayed volume data on the active futures contract shows the highest level of activity, at a turnover of 236,000 contracts, since the February 5th plunge and reversal. We will see what leading fundamental driver takes precedence in the near future as the market finds its course for risk appetite.
Spot Silver - $17.08 // -$0.10 // -0.58%
Where other commodities would put in for a relatively active day Friday (compared to recent history); silver would exhibit little progress or volatility. Once again, we are presented with a clear reflection of the primary catalysts for this precious metal. As a speculative instrument, the lack of activity on the Dow Jones Industrial Average
(our standard-bearer for risk appetite) gave little impetus for this commodity to stray in otherwise quiet markets. However, the permanent link to the US dollar would offer a modest increase in volatility, though direction would not match what EURUSD
would suggest. For speculative interest, futures volume rose to its highest level in three weeks on turnover of 47,681 contracts Wednesday. Furthermore, the COT numbers showed a 4,107-contract increase in the net speculative long balance to a 35,165 total.
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Written by John Kicklighter, Strategist
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