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A Dollar Rally and DoE Inventory Surge Keep Crude Under Pressure

A Dollar Rally and DoE Inventory Surge Keep Crude Under Pressure

2010-03-24 23:29:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

A Dollar Rally and DoE Inventory Surge Keep Crude Under Pressure

Crude Oil (LS NYMEX) -  $80.59  //  -$1.32  //  -1.61%

There was a very volatile and easily-interpretable fundamental driver in Wednesday’s Department of Energy crude inventory report today for commodity traders to react to; but in the end this data would be released well after the market was in motion. Drawing a quick end to a failed bounce back towards the popular $83 level, the active crude futures contract on the NYMEX extended a tentative pullback started in the later hours of Tuesday’s session. Despite the fear emanating from the Euro are in the morning, the natural resource’s losses were not likely a reflection of this uncertainty – at least not directly. Responding more readily to ongoing debate over the handling of a Greek bailout and the news that Portugal was downgraded, the US dollar would fall back on its role as a safe haven currency and act as the primary counterpart for the euro. In turn, as the primary pricing instrument for crude, the dramatic rally in the dollar would translate into a notable dip in the commodity. However, unlike EURUSD, it is rather clear that the active crude futures contract has not yet established its own bear trend. This leaves oil in a lurch for direction. A steady trend of appreciation for the US dollar could certainly draw its prices down. However, a true trend will likely have to come from a real turn in risk appetite.

While waiting for investor sentiment to develop, there was plenty of hard fundamental data to react through Wednesday’s session. For energy traders, the most readily identifiable report was the US Department of Energy’s (DoE) weekly inventory report. According to the government, stockpiles of the raw material surged more than four times the Bloomberg consensus with a 7.25 million barrel increase to push total reserves to 351.3 million barrels. The brought the trend of consecutive weekly increases to eight (still the longest trend since May). At the same time, gasoline and distillates would once again part ways with the crude report. Gas stockpiles would drop 2.72 million barrels and the refined group of products including heating oil would fall 2.42 million barrels. Among the more notable statistics, though, imports surged 12 percent to 9.4 million barrels per day – the highest level since September. What’s more, refinery capacity stepped higher to 81.1 percent, indicating a considerable excess of utility the market can absorb before demand hits levels that can significantly alter prices. In macro news, the growth outlook helped to offset the dollar’s influence today. In the European hours, activity indicators for the service and manufacturing sectors in the Euro Zone unexpectedly climbed for their March reading. The composite figure rose to its highest level since August 2007. In the US (the world’s largest economy and energy consumer), the February durable goods orders figure rose for a third consecutive month. This sets a strong precedence for a global recovery, though it will take a considerable time for it to fully develop.

2010.03.24.US.img.1

Commodities - Metals

Gold’s Alternative Investment Appeal Doesn’t Overcome the Dollar’s Impressive Rally

Spot Gold -  $1,085.90   //  -$19.25 //  -1.74%


There were two diametrically opposing drivers in play for gold Wednesday. Appealing to the metal’s function as an alternative to traditional fiat currencies, the debate over the proper method for assisting Greece intensified with renewed opposition from those that believe funds from the IMF will actually hurt the euro. Adding a new level to existing concerns, Fitch shook the market when it downgraded Portugal’s sovereign credit rating. This is a reminder that the European-area’s troubles run deeper than merely offering a contingency for Greece should it near a default. However, in spite of this news, risk appetite trends would remain relatively steady. Fear of a global financial shock and domino effect for all currencies proved unfounded. Yet, with the news, the US dollar stood ready with its influence as a safe haven currency and its improved yield outlook (well above that of the euro). The biggest rally from the single currency since December 4th would easily clear the cobwebs of congestion that had left the market dormant for a month-and-a-half. And, without an offsetting drive in either risk trends or flight to safety, the greenback’s standout move would naturally step up as the most influential gold drive for the day. Now pushing six week lows of its own, gold is on the verge of a new bear trend and awaiting the next driver to complete the trend. The most likely driver from here: a shift in risk appetite.

Spot Silver  -  $16.60   //  -$0.44  //  -2.55%


With a focused response to risk trends and the health of the US dollar, silver’s response to today’s fundamental develops was relatively clear. An aggressive rally from the greenback would translate into the sharpest decline for the precious metal since the February 4th plunge. This is a notable move towards developing a new bear trend; but conviction in such a development is imperative. As such, the turnover (volume) and open interest amid the futures market will be essential to establishing a forecast. Two days delayed, volume picked up at the beginning of the week and open interest has slowly trend off its six-month low since the beginning of the month. 

2010.03.24.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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