North American Commodity Update
Commodities - Energy
A Much-Needed Pullback in Equities Translates into a Sharp Drop in Crude Oil
Crude Oil (LS NYMEX) - $80.58 // -$1.62 // -1.97%
Having struggled with the $83 level for yet another week, oil finally collapsed under its own speculative weight Friday. Suffering the biggest daily decline in six weeks, crude has once again shown which direction volatility and momentum are better suited for. It was not difficult to discern the fundamental catalyst for today’s decline. A glance at the other major asset classes pointed to a distinct move towards risk aversion. This was particularly novel for equities as the Dow Jones Industrial Average
fell for the first time in nine consecutive sessions. The appetite for yield and risk has not been particularly strong over the past month-and-a-half despite the general bearing the markets have maintained. Therefore, a correction can cover considerable ground by unwinding excess premium built into prices. The impetus for today’s wave of risk aversion was likely investor sentiment itself. With the European Union back on a deadline for securing financial stability, Fitch issuing warnings on the stability of the US and UK credit ratings and governments the world over withdrawing stimulus; the market’s momentum was growing more and more circumspect. However, this end-of-week reversal cannot yet be confirmed as a clear trend. With benchmark’s like the Dow and crude just off their highs, risk appetite can maintain its buoyancy for some time without a specific driver to further depress sentiment.
For contributing factors outside the pull of risk trends, fundamental activity was relatively mute Friday. The biggest surprise on the wires was news that the Indian central bank raised its benchmark lending rate for the first time since July of 2008. Representing the second largest consumer of crude oil amongst the emerging market, India’s efforts to tame inflation will subsequently curb economic activity and dampen fuel demand. While the global economy is on pace for a meaningful recovery, its pace still seems to diverge with the optimism that investors have supplied. The tame outlook for expansion has certainly translated into cool demand for the fuels of industry. This past week, the US Department of Energy reported a 4.2 percent drop in the week ending March 10th – the biggest decline since November 12th. For broader perspective, weekly inventories have grown for seven consecutive weeks for the longest such trend since May. Looking at market activity, the CFCT’s Commitment of Traders report showed net speculative long positions dropped 14 percent to 124,143 contracts. What’s more, with the NYMEX’s April crude contract set to expire this coming Monday; there may be additional volatility to start the week.
Commodities - Metals
Gold Suffers its Biggest Drop in Six Weeks as Risk Tumbles and the Dollar Rallies
Spot Gold - $1,106.19 // -$21.17 // -1.88%
Under relatively placid market conditions, gold’s lesser fundamental functions can have a greater effect on price action. However, when risk appetite and/or the US dollar
are forging a clear and strong trend; the precious metal will respond. Over the past weeks, risk appetite has developed relatively little progress while certain speculative-sensitive asset classes have nonetheless maintained a steady advance. This in turn encouraged a moderate appreciation in gold for its high volatility (risk premium) and its role as an alternative store of wealth. Today, concern over exchange rate stability was still high. The European Union is tasked with producing a viable rescue plan for Greece by next week. What’s more, rating agency Fitch followed Moody’s lead by issuing warnings on the US and UK that both countries were moving closer towards losing their top credit rating. However, these are not particularly news topics. A unique driver for Friday was the first drop in the Dow in nine days and a remarkable rally for the US dollar. Though related, the turn in sentiment and advance for the currency drew enough momentum to push the metal into its biggest drop in six weeks. The interest rate hike in India was another notable event for commodity traders. The largest consumer of gold in the world, India’s efforts to contain inflation will subsequently curb spending on discretionary goods. Looking at the COT figures, the net long speculative positioning on the COMEX dropped 4 percent to 200,346 contracts.
Spot Silver - $17.41 // -$0.05 // -0.29%
Though silver lacks for a role as an alternative to fiat currency, the metal certainly responds directly to significant changes in speculative interest and interest in the US dollar. Tipping over into the largest decline since the February 4th plunge, risk aversion bolster demand for the safe haven currency and thereby leverage selling pressure on the commodity. Taking stock of speculative positioning, the CFTC reported speculative net-long interest was trimmed by just 1 percent to 34,856 contracts.
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Written by John Kicklighter, Strategist
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