Crude Extends its Tumble as Growth Cools, Gold Stalls on Euro Troubles

By John Kicklighter, Currency Strategist Thu Nov 18 00:16:00 GMT 2010 North American Commodity Update

Commodities - Energy

Where Risk Trends Pull out of its Dive, Crude Maintains its Tumble

Crude Oil (LS Nymex) - $80.44 // -$1.90 // -2.31%

Though broader risk appetite trends were able to level off through US trading hours Wednesday, US oil maintained its tumble. This decline marked the fourth consecutive decline (fifth if Thursday’s unchanged performance is counted) and is thereby matches the worst performance the commodity has suffered since the series of declines through August 24th. The extension of this bearish phase is a combination of both fundamental and sentiment-based factors; but technical traders have no doubt taken note of the session’s low. Looking back at historical price action, the $80 figure besides representing an easily identifiable, even level is also a well-worn support/technical level and represents the mid-point of the September to December advance. So, while the technical trend channel of this period has indeed been breached, there is still meaningful support and the market has already retraced half of the previous two months’ advance.

For fundamental guidance on the day, we saw a shift away from risk appetite trends to the more tangible macroeconomic drivers. Looking at investor sentiment in fact, we see that the S&P 500 (a good, basic barometer for the level of optimism) was little moved through Wednesday’s session just a day after marking a critical shift in trend. This change in the backdrop reflect a market that is reluctant to unwind otherwise profitable positions and are therefore waiting to see the level of contagion financial problems in the US, China and especially Europe will have. In the meantime, the demand/supply balance behind oil’s fundamental value was tipped by a few big ticket developments. In Asia, China’s Premier followed up on his vow to fight inflation with a more refined effort to put temporary price controls on “important daily necessities.” This is a more elegant solution than simply vowing to put in inflation measures; but the effect on growth will likely be the same. What’s more, energy commodities can be grouped under necessities. Another indicator to note from China was the quarterly consumer confidence survey which dropped for the first time in six quarters. Moving forward to the US session, the lowest reading on core inflation on record warns of a slowing economy though does support stimulus efforts. Something to take note of for future concerns, October housing starts plunged 11.7 percent to its second lowest levelon record. Depressed activity, growing foreclosures and overleveraged real-estate derivatives could prove a new crisis.

From macro concerns to energy market-specific issues, we see that there was a big miss on the Department of Energy crude figures. Instead of the no change expected by economists, the API figures (which showed the biggest plunge since September 2008) were more reasonable forecasters with a 2 percent drop in inventories equivalent to 7.286 million barrels. On the futures market, the December contract is soon to expire; and we have seen activity roll out to the January contract – which reported a 52 percent jump in volume to its own record 341,921 contracts.

Crude Futures Chart (Daily)

Chart generated using FXCM Strategy Trader

Commodities - Metals

Gold Little Moved After Critical Break as Investors Wait for the Next Shoe to Drop

Spot Gold - $1,336.00 // -$3.70 // -0.28%

Though it would put in for a fourth consecutive loss, gold was still looking at a far more reserved decline through Wednesday’s close. This tempered pace fits both a fundamental pause from the speculative ranks and a meaningful technical backdrop. For guidance on the supply and demand course, the ‘alternative asset’ value for the metal was little changed as other gauges for sentiment trends were similarly little changed for the day. From price action, the break of the three-and-a-half month rising trend channel yesterday doesn’t mean the market is in free fall. The past month, the metal has developed a frequented level of support around 1,320 and there is still a range of short-term term rising trendlines to fall back on.

Yet, despite the technical levels that exist, fundamental and sentiment concerns can easily drive this market to resume its plunge or otherwise completely reverse the losses of the past week. There are many general financial and economic concerns that quickly puts the metal’s safe haven appeal and alternative asset value back to work. European developments are still at the forefront. However, with Ireland’s decision to not ask for financial aid at the monthly EU meeting, the region is floating in limbo. Nevertheless, EU, IMF and ECB members are scheduled to travel to Ireland and comb the nation’s finances to see if its banking system can stand up by itself. A passing or failing grade will be delivered soon. In the meantime, clearing housings for investors that are trading Ireland’s debt are boosting margin and there is concern that support for Greece’s bailout program is disintegrating. State-side, the US saw inflation trends cool to the lowest level on records going back half a century. This curbs the appeal of gold as an inflation hedge on the one hand but confirms the devaluing effects of Fed stimulus on the other hand. And, in Asia, investors are waiting to see what measures China will take towards cooling rampant inflation. This could curb speculative turnover globally and lower the risk of financial crisis from this particular region.

In addition to the big, intangible themes, we can see there is still a supply and demand influence on price. The World Gold Council released its 3Q market outlook with projections for demand growing through jewelry use, institutions, central banks and industrial. At the same time, the supply trend is also seen rising in the months ahead. One highlight for demand however shows India’s imports have through the first three quarters already overtook the total consumption of 2009 at 624 tons. Meanwhile, total ETF demand was little changed for the day.

Spot Silver - $26.17 // $0.53 // 2.07%

Wednesday’s performance for silver was essentially a mirror of the previous day. There was little progress made as volume on the active December contract dropped to its lowest level since November 2nd. Momentum has slowed on this metal’s decline for a number of days; yet it is still early to say whether this is simply a reduction in speculative interests after the increase in margin by the CME or a shift back towards optimism.

Spot Gold Chart (Daily)

Chart generated using FXCM Strategy Trader

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Written by John Kicklighter, Strategist

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Thu Nov 18 00:16:00 GMT 2010

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