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A Tentative Speculative Recovery and Dollar Plunge Sends Crude Oil to its Biggest Rally in Four Weeks

A Tentative Speculative Recovery and Dollar Plunge Sends Crude Oil to its Biggest Rally in Four Weeks

2010-03-16 23:29:00
John Kicklighter, Chief Currency Strategist

North American Commodity Update

Commodities - Energy

A Tentative Speculative Recovery and Dollar Plunge Sends Crude Oil to its Biggest Rally in Four Weeks

Crude Oil (LS NYMEX) - $81.79 // $1.99 // 2.49%

Following its first back-to-back drop in over five weeks, crude would put in for an immediate and forceful bullish reversal Tuesday with the combined help of a dollar tumble and recovery in risk appetite. In fact, rallying as much as 2.9 percent at the high point of the day, today’s advance was the most momentous in four weeks. With the active NYMEX futures contract little more than 2 dollars off the 17-month swing high set at $84 in early January and open interest posted just off its highest level since June 2008, the speculative backdrop promises volatility. However, a fundamental trigger is still required to put the market in motion, much less establish a new trend for the drifting commodity. Today’s sudden burst of volatility in response to sizable event risk suggests crude’s primary interest is still in underlying sentiment trends. In the Early hours of the US session, optimism was roused by the European Union’s vows to aid Greece should the country need the support. And, while there is still a sense of skepticism in the cheerleading and the loose suggestion of potentially pooling of funds into direct loans, Standard & Poor’s affirmation of Greece’s credit rating offers a tangible improvement in global financial conditions. Another notable boost for speculators was the Federal Open Market Committee’s decision to keep its benchmark rate at its record low and commentary to suggest it would stay there for at least six months. For traders, this translates into lower interest rates that will encourage growth, lending and leverage.

Though risk appetite considerations represented the primary driver for price action today, supply-and-demand factors would factor in as well. In the lead up to tomorrow’s Department of Energy inventory report, the industry-based American Petroleum Institute’s figures would add a bearish angle to price expectations. Crude inventories through the week ending March 12th rose a modest 403,000 barrels following a 6.5 million barrel increase the previous week. At the same time, gasoline holdings fell 3.654 million barrels and distillates dropped 3.181 million barrels. This matches consensus for the DoE’s report tomorrow where oil holding are seen rising 1.1 million barrels while gas and distillates contract. If oil stockpiles do rise, it would be the seventh consecutive week and set extend seven-month highs. Also important tomorrow is OPEC’s production meeting. The group’s president voiced his belief that production levels should not be altered and more than a few oil ministers have voiced similar sentiments. As for macro data, German investor sentiment contracted for a sixth consecutive week through March and US housing starts confirmed a pace that supports stabilization at still-depressed levels.


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

Commodities - Metals

Gold Benefits from Greece Bailout Doubts, Dollar Tumble

Spot Gold - $1,127.85 // $19.40 // 1.75%

Fundamental drivers aligned to support a sure-footed rally for gold Tuesday. The commodity enjoyed its most aggressive rally in four weeks and subsequently worked its way deeper between a medium-term rising trend and potential head-and-shoulders reversal pattern. Which setup the market follows will be decided over the coming days. In the meantime, the combination of improved risk appetite, sovereign debt concerns and dollar selling would form the optimal mix for bullish interest in the metal. Of the three, risk appetite was likely the biggest contributor to buying interest. Equities and other growth-sensitive markets were already on the rise through the Asian and European sessions; but the combination of the EU’s bail out plans and Fed’s inclusion of “extraordinary low” for an “extended period” in reference to its maintain of interest rates helped to fuel confidence. From the former event, the fact that Standard & Poor’s would remove its watch on Greece’s credit rating eased the immediate tension in the market; but doubts over the group’s effectiveness in putting out any fires that develops maintains gold’s value as an alternative store of wealth (to fiat currencies) in the face of sovereign debt risk. For the FOMC decision and commentary, the consideration that rates will be held at low levels for the foreseeable future means lending and leverage will build with time – another risk consideration. What’s more, the negative impact this has on the dollar itself feeds into gold’s function as a dollar hedge.

Spot Silver - $17.45 // $0.33 // 1.93%

Like the rest of the commodity block, silver would enjoy the combined rebound in risk appetite and the pull back in the greenback. Enjoying its biggest rally in two weeks, the metal would actually mark its highest close since January 20th. However, the highs of the past week are still in place and there remains hesitancy with risk appetite as well. Should the Dow overtake 10,730 and crude $84, silver will join in on a solid drive in speculative positioning.
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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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