North American Commodity Update
Commodities - Energy
Crude Oil (LS NYMEX) - $80.57 // -$0.04 // -0.05%
Avoiding much of the volatility that has developed for the currency market over the past 48 hours and the consistent trend that equities have enjoyed, crude is way deeper into the congestion that has developed over the past two weeks. With the active crude futures contract well off the $83 range high established last week and well enough off Monday’s swing low, the impetus for a breakout and trend revival is otherwise low. Nonetheless, activity in related markets and the speculative background has intensified, leveraging the potential for a significant move from the energy market before the week ends. In contrast to today’s relatively tight range from oil, European and US equities indexes would forge ahead. The Euro
bourses exhibited particularly robust strength with the German DAX
advancing 1.56 percent and the French CAC 40
climbing 1.28 percent. In contrast, while the Dow Jones Industrial Average
would follow suit in direction and extend its 18-month highs, the intensity was dialed back. This reflects a general hesitancy among the speculative set that is cautious about buying into a bull trend at its already dear levels. The same sentiment is translating into crude price action; but this commodity has maintained its psychological boundaries and has seen more congestion than trend (even a tempered one). Most market participants are awaiting the next clear signal for risk – whether it be a refueling of risk appetite or a deeper retracement of the 2009 build up. The most immediate threat to a stable market is the European Union summit. After the Portuguese credit downgrade yesterday and given the ongoing debate over the rescue options for Greece (speculators are busy gauging the effectiveness of these alternatives), the event has the markets focus. All that is needed now is a development that falls outside the market’s expectations.
Waiting for the next shift in sentiment, it is important to note that financial stability in the Euro Zone, efforts to cool the markets in China, warnings on the credit worthiness of the United States and other traditionally risk-related concerns have a very tangible fundamental effect on crude as well. With the economic recovery on shaky footing, the accessibility of credit and velocity of capital can help or hinder growth. In the United States – the world’s largest energy consumer – the outlook for economic activity is uneven and muted. In turn, this has led to levels of demand for crude that is well below the five-year average. With a consistent shortfall in consumption, steady output levels have led to eight consecutive increases in the weekly inventory figures (the longest stretch since May of last year). The most recent reading noted a 7.25 million barrel increase that brought total stockpiles up to 351.3 million barrels. At the same time, imports jumped 12 percent (the biggest increase since September) to 9.4 million barrels per day, while refinery capacity ran at 81.1 percent. At this rate, there is still a considerable ways to go before the supply/demand gap is closed; and at these levels, crude is hovering well above a fundamental level of equilibrium.
Commodities - Metals
A Stalled Dollar Curbs Gold’s Primary Fundamental Driver
Spot Gold - $1,090.73 // -$4.08 // -0.38%
Though gold would not display the same level of volatility as the US dollar
yesterday; the commodity was certainly taking its cues from this market heavy weight. Today, however, this driver has tempered its pace; and the precious metal’s momentum has subsequently dissipated. For the currency, the downshift in the level of activity can be attributed to relatively stable risk trends to follow up on the critical technical break from a month-and-a-half long period of congestion. In contrast to gold, which through recent history has stood as speculative asset; the dollar is one of the favored safe havens in the broader financial market. Directionless background sentiment trends and a stationery dollar translates into stable gold prices. However, this hold on direction may not last for long. The dollar has already surpassed a significant barrier to further appreciation and the European Union’s discussion over its rescue efforts for Greece and other struggling members could easily spur the commodity back into action. Depending on the developments that come out of the EU meeting, the event could play to a number of gold’s roles. Speculative asset, safe haven, dollar hedge and fiat currency alternative are all viable roles that the commodity could fulfill given the correct situation. While awaiting a clear catalyst and direction, speculators are also tuning into the discussion at the CFTC that is considering whether to impose position limits on metals trading. Policy officials are assessing whether caps on speculative trade size could avoid market manipulation; but banks and traders are arguing that such limits will encourage business to move overseas.
Spot Silver - $16.71 // -$0.13 // -0.77%
After a day of respectable volatility (at least compared to gold), silver ended Thursday’s session little changed. Through the early hours of the day, the metal rose as much as 1.7 percent, retracing nearly two-thirds of the previous day’s plunge. This strength was founded through the pull back from the dollar with modest assistance from the steady rise in equities. However, just as certainly as the commodity would rise on the benchmark currency’s stumble, it would also give up its gains as the dollar rebounded through the second half of the US session.
Written by John Kicklighter, Strategist
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