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Without Risk Appetite, Crude May Hold $83

Without Risk Appetite, Crude May Hold $83

2010-03-18 22:36:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

Without Risk Appetite, Crude May Hold $83

Crude Oil (LS NYMEX) - $82.06 // -$0.87 // -1.05%

Investor sentiment didn’t collapse Thursday; but neither did it make significant progress towards optimism. Over the past month, a general appreciation in capital markets has been supplied with an otherwise tepid sense of conviction. In the upswing from $69.50 from the beginning of February back to the 17-month high set back in January, the market has simply covered a broad congestion channel that has developed since October. Pushing beyond the now triple top at $83 and the psychological swing high at $84 will require a clear shift in the conviction of speculative positioning. Maintaining the drive will be even more complicated. The failure to forge new highs today would be a conclusion for most markets. The Dow failed to extend a push to new highs set for the year yesterday. Another sign of sentiment and an indirect driver on crude was the dollar’s late session rally. The primary pricing instrument for the commodity, the currency appreciated against most of its major counterparts with a particularly noteworthy reversal from EURUSD that prevented a consequential break. The pullback in sentiment and subsequent advance for the dollar was largely influenced by renewed turmoil in Greece. After finding an uneasy calm after the two-day EU meeting early this week, the market seemed as if it was ready to ignore this region’s troubles, for now. However, recognizing its own troubles, Greek Prime Minister Papandreou set a one-week deadline for the EU to draft a meaningful financial aid plan should the country need it. This is not an unreasonable step from Greece to stabilize its own finances; but it nonetheless reminds the market of the uncertainty that exists in the market.

Keeping a constant vigilance on the supply-and-demand dynamics of price action, there was limited data that meaningfully altered the global consumption forecast. Data from the UK included an industrial trends report for March that reported an unexpected contraction in orders – the first in six. In the US, the Leading Indicators composite for February projected growth for the next one to two quarters for a 13th consecutive reading. However, the 0.1 percent increase was also the weakest in the series. Assessing the potentially crippling effect that energy prices can have on the economic recovery, both UK Prime Minister Gordon Brown and French Prime Minister Nicolas Sarkozy called on Saudi Arabia (OPEC’s largest crude producer) to increase output in order to ensure prices do not grow out of hand. Just yesterday, the oil oligarchy (which accounts for 40 percent of global production) announced it would not change capacity for a fifth meeting. On the other hand, compliance among the group stood at only 53 percent through February.

COM318a

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Commodities - Metals

Gold Benefits from Renewed Uncertainty in the European Union

Spot Gold - $1,126.66 // $6.31 // 0.56%

Risk appetite was curbed and the US dollar enjoyed a respectable rally Thursday; and yet, gold was still able to put in for an advance on the day. The many facets of this precious metal have made it a robust asset that can switch back and forth between speculative commodity to safe haven for weary investors. Today, the retracement in sentiment just after other prominent market benchmarks forged new highs certainly weighed on the metal. However, the source of this fear and uncertainty would inadvertently spark another source of demand that is common to gold: its appeal as an alternative store of wealth. While its role as a dollar hedge is well known, its function as a general substitute for fiat currency itself is far more significant. Stirring recently dormant concerns surrounding the stability and fiscal health of the European Union, Greece offered an ultimatum to the governmental body to develop a financial aid plan within a week or the nation would pursue other options to secure its finances. This is a significant step towards finding a real solution, but it nonetheless taxes the value of the shared currency: the euro. Therefore, investors are concerned enough about exchange rate volatility to seek harbor in gold. Other fundamental updates on the day would see the metal’s value as an inflation hedge dim after US inflation data reported the core consumer index cooled to its weakest pace since February of 2004. On the other hand, the World Gold Council’s update on central bank accumulation through 2009 revived confidence that a major buyer was still in the market. According to the industry group, central banks bought the most purchased 425.4 tons for reserves last year (the most since 1964) to bring total holdings up to 30,117 tons, or approximately 18 percent of world’s mined gold.

Spot Silver - $17.41 // -$0.05 // -0.29%

Once again, gold and silver would diverge in their path Thursday. However, the tempered bearing on risk appetite would ensure that the deviation would not be too large. Where the more expensive metal was able to appreciate in virtue of it being used as a well-known alternative store of wealth, silver would have to fall back on its fundamental dependencies on the US dollar and investor sentiment. Optimism among the speculative crowd would ease only modestly; but the greenback put in for a significant enough rally through the European and US market hours.

COM318b

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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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