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A Dramatic Bearish Swing for Crude Oil Ends with a Bullish Close

A Dramatic Bearish Swing for Crude Oil Ends with a Bullish Close

2010-03-23 00:07:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

A Dramatic Bearish Swing for Crude Oil Ends with a Bullish Close

Crude Oil (LS NYMEX) -  $81.70   //  $0.73  //  0.90%

The new trading week started out with meaningful follow through on oil’s accelerating selling trend heading into this past Friday. However, soon after marking a meaningful technical break from a steady rising trend, the commodity would put in for a dramatic reversal. In fact, given the high level of volatility behind the market and the sharp turn that was made around the open of the US session, the active crude contract would put in for the most aggressive retracement seen in nearly four months. From the session low to high, the market advanced $2.92 or 3.7 percent. What was the source of this remarkable about face following the biggest daily decline in six weeks just this past Friday and a meaningful technical break forged just not hours before the change of heart? It is not difficult to match up this commodity’s about face with the distinct tumble in the US dollar following a morning rally. As the primary pricing instrument for most oil deals, the US dollar has a significant impact on the value of the commodity. What’s more, with equities rising throughout the day, the absence of the dollar’s influence would free the commodity to realign itself to a general recovery in speculative trends. That being said, the ability of stocks to maintain their steady climb, the dollar’s maintenance of broad congestion and crude’s inability to surpass its previously establish 18-month swing high offers a very mixed picture of investor sentiment. Something will have to give soon.

To offer some fundamental color on the energy market’s outlook Monday, there was a surprising round of growth forecasts offered up by various sources. For the United States (the world’s largest energy consumer), Fed member Lockhart offered up a buoyant forecast of 3 percent expansion for the year. In contrast, economic forecasts for Europe’s two largest economies were somewhat discouraging. The Bundesbank warned that Germany’s economy could contract through the first quarter of the year while the Confederation of British Industry predicted the UK was looking at a “slow and sluggish” recovery of its own. On the other hand, it has been argued that developing nations and emerging market economies could compensate for diminished demand among the industrialized world. Today, China reported record imports of crude through February (5.2 percent) that lifted the stockpiles to 28.2 million tons. As the world’s second largest energy consumer in the world, China can fill a substantial gap in demand. However, the government’s very public aim to cool the economy and its financial markets may offer less support than many energy traders may expect.

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

 2010.03.22.US.img.1

 


Commodities - Metals

Torn Between Risk Trends, the US Dollar and Sovereign Debt Risk, Gold Would Hold its Losses for the Day

Spot Gold  -  $1,101.45   //  -$5.55 //  -0.50%

Compared to the dramatic volatility seen in the US dollar and in the energy bloc, it would seem that should follow suit. It is true that the precious metal maintains a distinct correlation to a range of prominent fundamental concerns; and this is subsequently where Monday’s stability would materialize. Much of the commodity’s price action can be attributed to its relationship to the US dollar. The greenback managed a significant rally prior to the US session hours that would extend the advance that finished off the previous week. Yet, with the open of the US exchanges, currency and commodity would mark contrasting reversals. The correlation between gold and the US dollar over the years is remarkable; but the link is too often mislabeled. Having stood in as a store of wealth many times in the past, gold can be deemed an alternative to the greenback to some extent. Yet, considering how prohibitively expensive it is, price’s sensitivity to demand and the influence that risk trends have on both assets in unique proportion; the relationship can be established through other channels and they can actually diverge more often than they coalesce. In fact, one scenario whereby the metal and dollar establish a strong positive correlation could occur should general concern over sovereign credit health send investors fleeing to liquidity in US Treasuries and away from fiat currency altogether for the safety of the precious metal. German Chancellor Angela Merkel’s warning this morning that the EU was not likely to elicit a bailout solution from its members by the end of this week leverages a clear risk of just such a development playing out.

Spot Silver  -  $16.94   //  -$0.05  //  -0.29%


Through the early hours of Monday’s session, it seemed silver had put in for a genuine reversal of a six-week bull trend. Down as much 2.3 percent through the morning, the metal was plunging three-week lows and making meaningful progress towards developing a true bear trend. However, with a reversal from the US dollar and relatively stable risk appetite (as defined by stocks’ performance) throughout the day, a mid-day reversal would retrace nearly all of the early losses. This intraday turn has effectively deferred a reversal for another day.

2010.03.22.US.img.2

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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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