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Oil’s Impressive Rally Cut Short by Liquidity and Discouraging Data

Oil’s Impressive Rally Cut Short by Liquidity and Discouraging Data

2010-05-28 22:50:00
John Kicklighter, Chief Currency Strategist

Commodities - Energy

Oil’s Impressive Rally Cut Short by Liquidity and Discouraging Data

Crude Oil (LS NYMEX) - $73.97 // -$0.58 // -0.78%

Just as surely as crude’s impressive tumble from May 3rd to the 20th required a reversal to equalize the markets, the 11 percent rally from Tuesday’s trough to Thursday’s peak would necessitate a correction of its own. It was the perfect day to cap the NYMEX’s WTI contract to a 50 percent retracement of its May range at $75.75 as volatility was stunted by the fast approach of the weekend and the knowledge that it would be a three-day weekend for US and UK traders as Monday was a holiday. Normally, the effect of an extended holiday on capital markets is that the market starts to thin out early as large investors turn in early on the basic assumption that others are doing the same. A further curb on activity was the general lack of fundamental drive. The economic docket was relatively light following the thick round of Japanese data; and there weren’t any headlines that would stir speculation over the development or recession of financial crises until late in the day. If released earlier in the week, the news that credit rating agency Fitch had downgraded Spain’s sovereign debt rating could have lead to a slump in risk appetite and a move in the capital markets to match this discouragement. Yet, with the floor trading session nearly closed and liquidity draining quickly into the weekend, the reaction would be limited to a short-lived adjustment from the euro and other highly-attuned assets.

Looking ahead to next week, after the market’s fill back out and American and British banks open back up after the holiday, speculation will start back up immediately. An entire weekend of downtime may help dampen the overall reaction to the Spain news today; but where it doesn’t provide in short-term volatility it will make up for it in long-term insecurity. Centering in on the European Union and its financial troubles, the market is eagerly awaiting the start of the G20 meeting that begins late in the week. More likely than not, the commentary that comes from this gathering will not offer any real assurance that the world’s most prominent threats will be answered anytime soon. No doubt, there will be some mention of the EU’s fiscal uncertainties; but pushing through meaningful policy that offers real relief to the region is highly unlikely. And, simple statements of confidence have lost all meaning for the trading community. Other sources of speculative interest include Friday’s US non-farm payrolls report. This particular indicator is a favorite amongst investors; and by that fact alone there is likely to be volatility in the energy market following this report. Yet, there is real potential for this particular release to truly alter the outlook for growth n the US and thereby energy demand from the world’s largest petroleum consumer. The forecast for 500,000 new jobs having been established in May would certainly bolster the sense of recovery (even if the details and overall trend are questionable).

And, just so we know how the speculative market is positioned. A look at the Commodity Futures Trading Commission’s Commitment of Traders report shows that net long positions in NYMEX crude plunged 40 percent to 40,443 contracts.

Crude Futures Chart (Daily)

Commodities - Metals

Gold Liquidity Drains before Spain Downgrade but the Markets won’t Miss NFPs and the G20 Meeting

Spot Gold - $1,214.38 // $1.725 // 0.14%

Though it would not enjoy the same level of volatility many of its speculative counterparts, gold was able to close out the week with five consecutive daily advances. This is a technically remarkable trend as we haven’t seen consistency like this since the period ending April 9th; but realistically, the tempo of the advance offers bulls little room for comfort come next week. This week has been defined by a lack of clear direction on larger fundamental concerns – most importantly, the stability of sovereign credit risk and the impact that could in turn have on different nations’ assets. Today’s otherwise quiet session was disrupted by Fitch’s unexpected downgrade of Spain’s sovereign rating and subsequent quality reduction on 14 classes of CDOs that are guaranteed by the government. This has very real-world implications for the nation by restricting its ability to raise funds from the open market. However, the impact this event could have had on the commodity was dampened by the lack of participation by European traders. With the COMEX pit close quickly approaching and the long-weekend ahead of American traders, the speculators would defer reaction to the news for another day. Next week, though, this particular event may be lost in the sea of scheduled event risk. Establishing yield potential early in the week, gold bugs will watch the RBA and BoC rate decisions to see if the government will raise the bar on risk/reward with government assets – helping compensate investors for taking exposure during this uncertain times. Better positioned to rouse a response from the metal crowd though is Friday’s NFPs. This top event risk will act as a proxy for global growth (though it may not deserve this distinction); and the forecast for a 500,000-job increase could certainly get the ball rolling. Assessing exposure as we prepare for next week, the COT’s data shows speculative long positions fell by 2 percent on the week to 227,691 contracts (13 percent from the record high set at the end of 2009).

Spot Silver - $18.39 // -$0.13 // -0.68%

Despite the relatively reserved level of price action for other speculative assets, silver would see activity that was easily in line with what we had seen the rest of the week. By the end of the day, however, the precious metal would end in the red and directly in the middle of an otherwise wide range day. The lack of direction matches what was occurring with stocks and other growth-linked assets. Further, a lack of movement from gold would help calm the entire metals group. From the COT, long speculative positions fell 19 percent from the previous week to a net 34,832 contracts.

Spot Gold Chart (240 Minute)

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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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