North American Commodity Update
Commodities - Energy
Crude Volatility Dissipates as Technical Barriers, Sentiment Impasse Anchors Activity
Crude Oil (LS NYMEX) - $81.83 // $0.23 // 0.28%
Following two days of extraordinary volatility, crude finally settled back into a tame pace of progress Tuesday. Compared to Friday’s aggressive decline (the largest in six weeks) and the sharpest intraday reversal in four months yesterday, today’s range and daily change was dramatically scaled down. This should not come as a surprise however given the lack of a clear direction for underlying investor sentiment throughout this dramatic swing and the highly visible technical levels that will no doubt require a considerable level of conviction amongst the speculative crowd to overcome. Today, the standard-bearers of risk appetite (the Dow Jones Industrial Average
and US dollar
) were both relatively reserved. The equities market’s slow yet deliberate advance is keeping the commodity buoyant through it ties to investor sentiment, yet the dollar’s resilience to this constant drive undermines its intensity while simultaneously maintaining the level of crudes primary pricing instrument. For this commodity to make headway on a deeper reversal of the February/March advance or otherwise overtake the 17-month high $84 level, one of these two benchmarks will have to falter.
Adding to the fundamental view of the energy bloc’s health, macro event risk offered little to encourage speculation that the broad gap between supply and demand was closing. From the US (the world’s largest consumer of crude), the National Association of Realtors reported a modest 0.6 percent decline in existing home sales through February. This figure would curb the previous months’ sharp declines for the vital sector; but it is far from encouraging a robust forecast for expansion. Fed board member Yellen would echo these sentiments when she forecasted that the economy would operate below potential for several years. The Minutes from the Bank of Japan’s last policy meeting would offer an update on another prominent energy importer. Some policy officials believed risks were more balanced while a group was concerned about “considerable downside risks to the economy.” The growth/demand picture will solidify tomorrow with the advance manufacturing sector activity figures for Europe, the German business confidence survey and US durable goods orders report. For a more timely view of demand, analysts expected the US Department of Energy’s weekly inventory report will confirm the eight consecutive increase in crude holdings – the longest series of increases since May. In contrast, both gasoline and distillate holdings are expected to contract. In the meantime, the API (American Petroleum Institute) released figures today that revealed oil imports dropped to their lowest seasonally-adjusted levels in five years through 2009. As would be expected, a notable 29 percent drop in shipments from Saudi Arabia (420,000 barrels/day) was partially offset by a 24 percent increase in imports from Mexico (983,000 barrels/day) and 0.3 percent from Canada (906,000 barrels/day). Given the repercussions of the worst recession in modern history, this slump is not unexpected. What’s more, expectations for energy demand are shifting to the emerging market; and yesterday’s report that Chinese crude imports rose 5.2 percent through February helps to stabilize the fundamental picture for the commodity.
Commodities - Metals
Will Gold Find Reprieve in an Unfavorable Solution to Greece’s Financial Troubles?
Spot Gold - $1,101.90 // -$0.35 // -0.03%
Without an overpowering shift in either the US dollar or a growth-linked speculative market benchmark, gold would come under little pressure to develop its own momentum. And, though the commodity would put in for the first positive close in three days, it was nevertheless carving a reserved range. In attempting to establish the next trend for this market, gold bugs are struggling not only to establish which of the metal’s primary fundamental drivers (risky asset, dollar hedge or fiat currency alternative) holds the greater influence over price action but are also awaiting a significant development from any one of these dynamics. The picture on sentiment was once again mixed Tuesday with equities extending its steady yet lackluster climb, while the safe-haven US dollar once again held its ground. The greatest source of potential through the remainder of the week is sovereign credit risk and the market’s need for an alternative store of wealth to fiat currencies. Last week, rating agencies Moody’s and Fitch warned the market that the US and UK among other industrialized nations had moved closer to losing their top debt ratings. However, the greater source of uncertainty resides in Greece’s deadline for the European Union to draw up a clear rescue plan should the nation require assistance. There has been considerable disagreement over the best approach to such a contingency plan; but today, there was a remarkable development in the debate. According to early reports, French officials have allegedly fallen into Germany’s camp in believing a combination of an IMF/Euro
-area answer to Greece’s troubles is the best policy. It is difficult to discern what influence this will have on sentiment; but it certainly undermines the sanctity of the euro. If that is the case, the demand for an alternative to paper currency could bolster the precious metal.
Spot Silver - $16.98 // $0.00 // 0.00%
Another intraday reversal prevented the development of a meaningful bear trend for silver. This precious metal is no doubt receiving a boost from tangential demand for risk through the equities market; but its activity more closely aligns to the US dollar’s own progress. The delayed volume and open interest data from the futures market shows turnover picked up slightly with the two-week average volume ticking up from a two-month low. Net positioning has similarly trended higher since the beginning of March – notably synchronizing to a period of stabilization in price action.
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 firstname.lastname@example.org