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Crude Shirks Rise in Crude Inventories to Focus on Risk Appetite

Crude Shirks Rise in Crude Inventories to Focus on Risk Appetite

2010-03-17 20:53:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

Crude Shirks Rise in Crude Inventories to Focus on Risk Appetite

Crude Oil (LS NYMEX) - $82.77 // $1.07 // 1.31%

Riding on the momentum of yesterday’s impressive reversal, the active NYMEX crude futures contract was able to fully compensate for its Friday/Monday losses and subsequently push the market back to its $83, two-month high. This nearby high clearly holds significant influence over the market as a psychological level given its ability to hold up follow through; but for true recognition, the 17-month month high at $84 will be the true catalyst for sentiment. On the other hand, merely overtaking this figure does not guarantee a shift in conviction amongst market participants. For one thing, volume fell back to its lowest level since the February 19th/20th contract rollover despite the proximity of new heights. More importantly, the quality of risk appetite that has contributed to this asset class’s (and very well all markets that have a distinct connection to growth forecasts) advance seems to be lacking. New milestones are being made by equities (the Dow has advanced to a new 17-month high) and other investor-favored securities; but the achievement seems to be in name only and not sentiment itself. Indeed, there are many financial threats to the global markets on the horizon while potential growth and returns promise relatively little; but speculation itself decides the momentum and sustainability of such trends.

With the encouragement of risk appetite and the presence of meaningful high, speculative interests would overwhelm clear-cut fundamentals released on the day. At the top of the list, this morning’s Department of Energy inventory figures would prove lacking for market-influence. Following a disappointing 403,000-barrel increase in the API’s figures yesterday, the government’s reading on crude stockpiles reported a smaller-than-expected 1.01 million barrel pickup through the week ending March 12th. Nonetheless, this was the seventh consecutive increase (the longest trend of growth since last May) which subsequently pushed total stores to a 344 million total. Furthermore, fuel demand reportedly dropped 4.2 percent to 18.8 million barrels per day, the biggest drop since the period ending November 6th. On the other hand, this rise in inventories may not balloon the supply/demand gap for long. Crude imports reportedly fell 0.8 percent to its lowest level since March 2002. With inflows restrained, a rebound in demand (which is certainly possible given the consumption of refined products like gasoline and distillates) could quickly absorb the United States’ glut. What’s more, OPEC officials decided at their first official gathering this year to hold production targets for the fifth consecutive meeting. This market continues to be dependent on risk appetite and fundamental demand.

COM317a

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

 

Commodities - Metals

Risk Appetite Does Not Translate into an Easy Break for Gold

Spot Gold - $1,122.30 // -$5.40 // -0.48%

Drawing an accurate comparison between markets, gold would follow the dollar more than it would the Dow Jones Industrial Average. The advance in the equities index has been impressively consistent and today’s push would leverage the market to a fresh 17-month high. However, surpassing this psychological milestone would do little for volatility and momentum. This suggests that, though the markets are indeed climbing, there is still a meaningful disconnect in assurance that assets are actually undervalued at their current highs. This translates into skepticism and a particular sensitivity to any new financial uncertainties that pop up. However, from speculative appeal to fundamental value, there is also a concern that the commodity’s role as a dollar hedge is keeping the market back. Though the greenback has lost value in the past few days, the currency is stubbornly holding up in the face of risk appetite trends. The currency’s strength is linked to its own climb up the risk spectrum. On the other hand, we may see inflation take up its own presence. Following the Federal Reserve’s promise to keep lending rates at an “exceptionally low” level for an “extended period,” the Bank of Japan expanded its own lending facility to reverse deflationary trends and the Bank of England noted concerns that price pressures could pick up. It may still be some ways off; but when inflation trends do build to remarkable levels, governments will have a difficult time curbing them as policy authorities will have to weigh their efforts against a growth objective.

Spot Silver - $17.48 // $0.02 // 0.11%

Like gold, silver was unable o establish meaningful follow through on yesterday’s impressive advance. Torn between a stable US dollar and a modest build in risk appetite, the metal would end the day little changed. To overtake last week’s swing high and truly reestablish its bullish trend, the commodity will likely have to find support through a rise in risk appetite strong enough to encourage a meaningful dollar decline. In the meantime, delayed futures market data shows open interest has pulled back from its seven-week high and trading activity (volume) has fallen to levels not seen in months.

COM317b

Discuss gold and oil trading with other traders in the DailyFX Forum

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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