Until recently, momentum behind the effort to turn US crude’s bullish range reversal into a clear trend has been relatively reserved. That is until today when the active futures contract cleared a notable range resistance around $76 and $75.50 and proceeded to overtake the 200-day moving average.

North American Commodity Update

Commodities – Energy

Crude Marks a Strong Bullish Breakout to a Monthly High with the Support of Risk Appetite and a Weak Dollar

Crude Oil (LS NYMEX) – $76.94 // $1.82 // 2.42%

Until recently, momentum behind the effort to turn US crude’s bullish range reversal into a clear trend has been relatively reserved. That is until today when the active futures contract cleared a notable range resistance around $76 and $75.50 and proceeded to overtake the 200-day moving average. A quick appraisal of the bearing and activity level of the broader speculative market leaves little doubt as to what the primary driver for today’s breakout was – risk appetite. For context, the benchmark US equity indexes put in for daily advances greater than 2 percent, which subsequently offered a meaningful breakout from congestion and push to monthly highs. The source of this sentiment is debatable. It would be easy to cherry pick economic indicators as the foundation for this rally; but that would be short-sighted and erroneous. In reality, the strength in the capital markets can be attributed to a natural correction following a sharp decline in speculative assets that was magnified by the imminence of a potential financial crisis blossoming out of the European Union. While conditions continue to deteriorate in this region, the threat of a seizure in credit and lending has lost some of its intensity. Therefore, in the absence of an event or news that could capsize stability market-wide, oil and other speculatively-guided assets could continue their advance until risk premium has balanced out.

Another consequence of the recovery in sentiment is the impact it has on the US dollar. The safe haven currency is the primary pricing instrument for oil (and especially the New York based light sweet crude contract); and considering the single currency had rallied steadily for seven consecutive months without a significant correction, a reversal can last for some time and cover significant ground. We can already see the effects the greenback is having on oil prices. Whereas the US-based crude futures contract has rallied to a new high when measured on a dollar-basis, the market is still restrained to a 62.75 / 60.25 range when calculated in euros. Speaking of crude priced in different currencies, Europe’s benchmark crude contract – the ICE-based Brent contract – rolled over from the July to August expiration. The difference between the US and European standard has widened to $0.61 in the WTI’s favor – the biggest positive skew since April 6th. At the same time, the rebound in the active NYMEX futures contract coupled with a drop in the CBOE crude oil volatility index to its lowest level in over a month (37.7 percent) has helped to ease fear in the form of a greater premium for the contract set for expiration two years down the line. The difference between (contango on) the July 2010 and July 2012 contracts dropped to $7.89.

For fundamental considerations Tuesday, supply and demand have both seen adjustments (though output will likely have little long-term baring on price unless there is a dramatic shift). For supply, the API inventory figures for the week ending June 11th rose for the first time in three weeks by 579,000 barrels. This sets tomorrow’s more closely watched Department of Energy readings up for a potential surprise. Bloomberg’s consensus forecast is for a million barrel drop to follow up on the previous period’s 1.83 million barrel contraction. On the demand side of the scales, the macro data on deck this morning was encouraging. A leading indicators composite index for China unexpectedly reported its biggest jump in 14 months, suggesting momentum behind the world’s second largest economy could carry energy demand higher. Yet, it is also important to point out that this was a reading from April. The Empire manufacturing index was similarly encouraging, reporting the 11th consecutive month of growth. Yet, neither of these indicators barely budges the global outlook.

Commodities – Metals

Despite a Strong Advance in Stocks and Other Risk-based Securities, Gold Advances Tuesday

Spot Gold – $1,232.75 // $11.50 // 0.94%

It was another unusual turn from gold today. Risk appetite would pick up in the early hours of trading Tuesday’s and build momentum into the US session. However, alongside an impressive 2.4 percent rally in the S&P 500 Index, spot gold would itself climb 1.1 percent. This is another paradoxical performance for an asset that is considered one of the financial market’s favored safe havens. Furthermore, with today’s developments, the strong negative correlation the metal has formed with positive-bound risk assets has taken an even greater divergence. Yet, the reasoning for this unusual turn of events is the same. Today’s advance for equities and other commodities was drive by a drive in speculative interests rather than a true shift in fundamentals. Looking beyond a ‘rebound’ in depressed speculative assets and a revived demand for yield, today’s economic backdrop wasn’t significantly improved. From central banks in Asia, uncertainty was the primary take away. The Bank of Japan issued another 3 trillion yen lending program to help support growth and fight deflation, which the government has failed to do on its own. Even the hawkish leaning RBA would issue a warning over the impact that the European Union’s financial troubles could have on the rest of the world. Speaking of the EU, the European Commission produced a report for policy makers that suggested Spain and Portugal’s debt troubles could snowball if they did not do more to tame their deficits. Given its stability and attachment to deeper fundamental currents, gold is perhaps the best gauge for long-term trend and fundamental drive in the financial market today.

Spot Silver – $18.60 // $0.37 // 2.03%

Spurred on by a rally in both risk appetite and gold, silver would put in for its own advance Tuesday. The spot silver climbed more than 2 percent on the day; but the drive wouldn’t be enough to overtake the range high the metal has developed around $18.50/75. Despite the relatively tame pace of price action, speculative turnover has picked up substantially. The delayed volume data on the active Comex futures contract advanced to 52,784 through the end of last week and open interest is near its highest level in seven months.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Recent Articles By DailyFX:

• NZ Dollar Gains On China Growth Prospects, G8 Summit Keeps Euro Low
• Crude Oil, Gold Aim Higher As Risky Assets Mount Relief Rally
• Commodity Prices Have Scope To Rise Into The End Of Trading Week
• Yen Top Performer As Aussie, Euro Stabilize; Sterling Tumble Continues
• Crude Oil, Gold May Recover As Greece Eurozone Exit Fears Digest
• All Articles By DailyFX »

Leave A Comment :