North American Commodity Update
Commodities - Energy
Crude Oil (LS NYMEX) - $80.11 // -$0.43 // -0.53%
At the onset of Friday’s active session, the crude market was once again attempting to jumpstart a recovery. However, by the week’s end, the commodity put in a second, sharp intraday reversal ultimately keeping the bears in charge. For a ‘big picture’ perspective of oil’s health, the market has maintained a $4-range for nearly a month and has therefore quite clearly deviated from the Dow Jones Industrial Average
’s consistent climb to new 18-month highs. In turn, the market’s volatility, measured by the CBOE Oil Volatility Index, has cooled to levels that have not been seen since January (which was likely skewed by holiday conditions) and before that, December of 2007. Such complacency is often a precursor to volatility and reestablishment of a meaningful trend. What could get crude moving again? The drivers behind today’s otherwise reserved session offer clues as to what can spark the next trend for the energy bloc. The u-turn the market took around the beginning of the US market open reflected a general inflection point for the equities’ climb and the dollar’s decline. The connection to the currency comes through its function as a pricing instrument for the commodity; but it can also be linked to the unit’s safe haven status. As an asset that has a high level of speculative interest and does not provide any yield, the whims of investor sentiment have a leveraged influence over crude price action. Consequently, the next true trend for oil will most likely develop out of a shift in market-wide risk appetite.
Adding objective fundamentals to the mix, the background supply-and-demand for the commodity may add additional pressure for reversal. Today, the US Commerce Department released its final measure of fourth quarter GDP. An unexpected slip in the revision does not undo the statistic of a six-year high in the pace of expansion; but the slip in personal spending does remind that the year-over-year comparison sets current activity against the depths of a recession. The economic slump in the US and globally has severely depressed demand for fuel; and the world is far from the pre-crisis levels of production and expansion that drove energy consumption and prices to record highs. From a more timely measure on this imbalance in the supply chain, this past week’s DoE inventory statistics reported a 7.25 million barrel increase in crude stockpiles – the eight consecutive increase for the longest stretch of gains since May of last year. More importantly, with refinery capacity at only 81.1 percent, there is considerable room for demand to rise before it significantly leverages a price response through supply levels. Looking ahead to next week, there is plenty of macro data that could change expectations for demand. The US employment statistics, personal consumption, consumer confidence and ISM manufacturing report will offer a well-rounded view of pull-through demand from the world’s largest energy consumer. Other indicators of note include: UK manufacturing; Japanese industrial production and the 1Q Tankan survey; and German employment.
Commodities - Metals
A Gold Rally Begins with a Dollar Retracement, Continues Through Sovereign Uncertainty
Spot Gold - $1,105.75 // $15.25 // 1.40%
Unlike crude and US equities, gold was able to maintain its gains through Friday’s close. Closing with the biggest advance in a week, the metal was largely encouraged higher through the retracement of the US dollar
. As a favored hedge for the benchmark currency, the commodity can also trace its correlation to the greenback through their opposing connections to underlying investor sentiment. Whereas the dollar is a favored safe haven of the FX market, gold has been valued for its speculative benefits and high volatility. However, the influence of this single currency and sentiment would only stretch so far. Looking at gold’s value based in other major currencies, the commodity was sharply higher across the board. This would suggest a rise in its value as an alternative store of wealth to the traditional fiat currency. This is not an unusual concept given the uncertainty produced by credit rating warnings and downgrades as well as the ongoing uncertainty surrounding the European Union’s answer to Greece’s troubles. However, with the EU reaching an accord at its summit this week, wouldn’t this concern evaporate? While an agreement of shared responsibility in the event of a crisis between the European governments and IMF offers a clear support for Greece; there are still doubts to its application and efficacy. What’s more, it doesn’t solve the possibility of financial troubles springing up for other EU members or other major economies in the world. In other news, preliminary reports that a South Korean warship sinking near the North Korean maritime boarder raised international concern over the already tense region.
Spot Silver - $16.90 // $0.28 // 1.69%
Following gold’s lead when its counts, silver managed to bounce from three-week lows through Friday’s session; though, the commodity is still far from reversing the bearish bias that has recently evolved from March’s congestion. For drive, the metal was finding assistance from both investor sentiment and its link to the US dollar. Stocks would retrace early morning gains; but the larger bull trend is still intact. Filling in for the late session pullback, the greenback ended the day near its lows against the euro
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Written by John Kicklighter, Strategist
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