What was initially a much-needed bounce from the heavily sold NYMEX crude futures contract through the morning trading hours would eventually pitch into yet another daily loss. Though volatility is not particularly unusual for this speculative commodity, the benchmark US oil contract’s intraday reversal certainly caught tempted bullish traders off guard.

North American Commodity Update

Commodities - Energy

A Crude Bounce Turns into Six-Month Low as Speculative Concerns Override Mixed Data

Crude Oil (LS NYMEX) - $69.37 // -$0.71 // -1.01%

What was initially a much-needed bounce from the heavily sold NYMEX crude futures contract through the morning trading hours would eventually pitch into yet another daily loss. Though volatility is not particularly unusual for this speculative commodity, the benchmark US oil contract’s intraday reversal certainly caught tempted bullish traders off guard. From an initial advance of 2.9 percent on the day, the market would inevitably plunge 5 percent from its intraday high to flesh out a new six-month low. And, given the consistency of the $67/66 level as a frequented support, a push through this level would likely invite another wave of speculative selling interest. Can the bears keep up the pressure? From a speculative perspective, the market has fallen for 11 of the past 12 active trading sessions for a cumulative decline of nearly 21 percent. Furthermore, the CBOE Crude Volatility Index is near a six-month high with the options market pricing a potential 43 percent change in price over the coming year. From a fundamental perspective, risk aversion and position unwinding are the primary source of concern. Confidence in the European Union’s ability to avert a regional and perhaps global crisis has quickly dissipated since the announcement of a joint 750 billion euro financial life line for the member economies. Today, a temporary sense of confidence was found after Greece received its first round of aid (14.5 billion euros) and both Ireland and Spain reported successful attempts to access the debt market. However, this optimism would eventually falter in the face of the overwhelm doubt that has built up over the past month and news that Germany was prepared to ban naked short-selling and credit default swaps - complicating the market’s ability to hedge risk using nontraditional financial products.

However, the fundamental roots underlying oil’s tumble run deeper than mere diversification of speculative funds. While the traditional readings for change in growth may imply a robust recovery in economic activity; the actual levels of production and consumption in the US (and across the global economy) are well below the intensity that facilitated the run to comparable highs (and higher) in 2007. This excess premium is speculative build up that can be naturally burned off as investor sentiment sours and more realistic forecasts for growth trickle into the energy market. For an economic update Tuesday, the US would find a boost from housing starts data for April. While the improvement was modest and the general recovery trend far more mild than the initial plunge; it is a sign of a sure-footed recovery for a vital sector for wealth. Looking ahead to tomorrow, the advanced reading of Japanese 1Q GDP will offer an update on a major energy consumer. Also scheduled for release Wednesday is the Department of Energy’s inventory figures. Crude stockpiles are expected to have grown for the 15th time in the past 16 weeks by an estimated 500,000 barrels (a estimate challenged by the contract in the American Petroleum Institute’s own report of a 794,000 contract decline). Yet, with these figures, it is important to recognize the limited application of the data. These holdings figures are for the Light Sweet grade standardized to the NYMEX futures contract. This standard currently trades at a $5.51 discount to its UK Brent counterpart. There is always the chance that changes in stockpiles in Cushing, Oklahoma could encourage the US benchmark to close the gap with its European counterpart.

Commodities - Metals

An Intraday Reversal in Sentiment Leads to the Same from Gold

Spot Gold - $1,220.80 // -$1.65 // -0.13%

Through the Asian and European trading hours of today’s session, gold would turn from a trend of congestion to depreciation as global investors tested the speculative waters. Through the first half of the day, equities advanced, Treasury yields climbed and commodities rose. As one of the market’s favored alternative assets, gold would naturally suffer from the recovery in confidence by falling back to a one-week low. Though, not the standard safe haven asset, the precious metal would find its appeal was primarily diminished by the nascent rebound in currencies – most notably the euro – as the viability of stable fiat currency reduced the need to transfer wealth to a comparatively volatile and illiquid security. However, these concerns would be revived later in the day as US equities steadily declined and high-yield currencies marked an aggressive reversal following the announcement that a German regulatory body would ban naked short selling and credit default swaps on government debt – removing an avenue of flexibility in hedging. Assessing this catalysts influence, it is clear that it would not significantly undermine the financial health of the global markets; but taken into context with the consistent and meaningful withdrawal of capital from speculative positions, it is reason enough to abandon weak optimism. However, for gold itself, there is still the issue that the metal is at a record high. Trading at such rich values would make any perceived safe haven seem expensive. And, given the lack of a yield and shallow liquidity (as compared to something like the US dollar), the metal will find further appreciation more difficult to sustain.

Spot Silver - $18.96 // $0.05 // 0.26%

Silver is offering a strong correlation to neither speculative capital markets nor its safe haven cousin, gold. Through the first half of the active trading day, the commodity was set within the range established through Monday’s final hours – blatantly ignoring the build in speculative sentiment that encouraged European shares higher. Though, when the US exchanges opened for trade, all the good will would steadily be worked off. Oddly enough, silver would put in for a choppy advance during the US session with a performance that looked more like gold than stocks. Looking at speculative interest, open interest climbed through the end of last week to a month-high but volume is generally trending lower. Interest grows when an instrument trades at a record high; but further investment will wane as expectations for further appreciation diminishes.

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