North American Commodity Update

Commodities – Energy

Another Six-Week Low for Oil Sets a Bear Trend in Motion Ahead of a Wave of Growth Data

Crude Oil (LS Nymex) – $73.46 // -$0.97 // -1.30%

Despite a tangible lack of major event risk (scheduled and exogenous) this past week, crude has endeavored to extend the impressive trend that followed the reversal at the beginning of the month. Friday’s decline would set a new six-week low for the US-based futures contract. At the same time, the day’s performance would fit into a tumble that has spanned eight of the past nine active trading sessions and it would further threaten to overrun a very blatant rising trend channel that has developed over the span of three months. What speculators should ask is whether the reversal is complete or the further losses are in store. This week’s encouragement was exceptionally light – a condition that was reflected in the tepid pace of the decline. Looking ahead to next week, it looks like the market will not be left wanting for fodder to fuel its swings.

Over the past week, crude oil price action has been heavily dependent on underlying risk appetite trends that have produced moderate volatility for the capital markets but ultimately prevented the development of a clear direction. In the coming days, investor sentiment will have its way with price action once again; but it will likely do so through fundamental channels. Scanning the macroeconomic docket for next week, it is clear that there is a very heavy bias towards clarifying the outlook for global economic activity (or from a realist’s point of view, gauging how sharp the slowdown in the second half will be) with key GDP numbers. While the US, UK and German 2Q GDP numbers are all revisions; these updates carry with them significant meaning. For Germany, the first report of activity didn’t give details and was running the strongest quarterly pace on record. For the UK, economic activity has just struggled into the black. Finally, the US is expected to suffer a sharp downward revision that could pull the indicator below a one-percent pace. The collective role of this data will be as a counterpoint to the ballooning of inventories. It is important to reiterate the fact that the DoE reported total fuel holdings in the US rose to its highest level in over two decades this past week. Should the supply/demand dynamic shift even further through anemic growth, the market could find its way back below $70.

For a speculative review of the market close this week, we see that the most liquid US futures contract (for October expiry) reported 234,488 contract turnover for a step down from Thursday’s record high volume reading. Furthermore, implied volatility has fallen for a fourth consecutive day – not supportive of trend continuation. Alternatively, the CFCT’s readings of net long speculative holdings rose (albeit modestly) for a sixth consecutive week.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities – Metals

Gold Ends the Week on its Back Foot but its Bull Trend Remains Intact

Spot Gold – $1,227.60 // -$4.55 // -0.37%

Despite a market-wide slip in risk appetite, gold would not leverage its role as a unique safe haven and would instead end the day lower on its own. Some would use this occasion to confirm the precious metal’s revived link to the US dollar; but the fundamental support for such a theory is flimsy at best. Instead, the market was prone to a mild correction through an otherwise light day (from both a fundamental and turnover perspective). Gold has advanced for three weeks now; and the climb has been consistent but otherwise lacking for momentum. This gives investors and potential buyers plenty of time to contemplate the sustainability of near-record or record highs. There is no doubt a significant portion of the market that has invested in this commodity in an effort of making short-term capital returns rather than holding the metal as an alternative store of wealth to avoid financial catastrophe, inflation or sovereign risk. For this faction, a restrained pace of advance exposes the market to correction in the face of an unforeseen event. Yet, while today’s correction may leave the market on the defensive heading into the weekend, it doesn’t alter the overall trend of the past month.

Looking out over the coming week, there is plenty of big ticket scheduled event risk; but there is no guarantee that it will directly impact a fundamentally awkward gold market. The collective impact of the various growth readings could be influential enough to stir volatility or perhaps even reverse gold’s bull trend under the right circumstances. Individual growth readings are not as important as the general outlook for activity in the second half of the year. Should activity cool, it could exacerbate troubles with implementing austerity measures while supporting the nascent recovery. In fact, for some, it could set off a potential crisis; and that is where gold will really shin.

For speculators, it is important to note that volume on the liquid December Comex futures contract measured 69,811 contracts. Alone this might not tell us much; but looking at volume against price we can see that a steady drop in turnover during the rally shows fading conviction – often an early sign of a stalled trend. From the COT figures, net speculative long interest for the week rose 27,009 contracts to 204,228.

Spot Silver – $17.97 // -$0.33 // -1.80%

Silver would take from both its speculative ties and its proxy status to gold to suffer its biggest daily loss in three weeks. While the drop was substantial, it wouldn’t redefine the market’s trend. While off a range high of $18.50, the metal is still well within the range of the past two months. There is some talk around the market that silver is artificially deflated in its relative value to gold. If traders are positioning on this suggestion, they will likely see this theory fall through as market flows simply would not support such a distorted price for silver as is seen in gold – especially if gold itself cannot catalyze the next leg of an aggressive run.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

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