Following Friday’s impressive rally, crudes performance to start the week would leave both bulls and bears disappointed. While the US benchmark for the commodity would mark a two-week high on an intraday basis, the market essentially closed the day unmoved from where it opened. This lack of performance wasn’t unique to the energy bloc. In fact, this was the pace that most markets would take as traders sought out a clear driver for speculative interest but would ultimately come up short. And, in the absence of a particular catalyst, congestion would lead traders to unwind some of their high-risk positions and dollar shorts. Naturally, this would weigh on oil as an asset that is both growth-dependent and sensitive to risk appetite.
For a tangible assessment on the supply-and-demand aspect of the energy market, we would turn to an otherwise light macroeconomic docket. Perhaps the most influential piece of data through the day was the Chicago Federal Reserve’s National Activity Index for August. While all the individual components to this report are previously known, it is nonetheless helpful to see all these elements come together as a proxy economic activity forecast for the US. That being said, the -0.53 reading was worse than expected and further supports the general consensus amongst policy officials and economists that the world’s largest economy is cooling. As activity cools, so does the need for the fuel that drives production and output. For decisive influence, tomorrow’s listings will likely carry more weight. The US and German consumer confidence indicators will be particularly interesting to energy traders for their close ties to general growth forecasts as well as their influence over risk appetite trends. If we had to choose which of these two held greater potential, we would have to defer to the US reading as it has a greater precedence for stoking volatility and has been more consistently linked to growth trends. Secondary readings to take note of will be the final reading of the UK’s 2Q GDP figures and, the same region’s CBI Distributive Trades survey and US API inventory numbers due in the New York afternoon.
Looking more critically at the performance of the oil markets, it is important to take note of a few changes. First, the price differential between the benchmark US (WTI) and UK (Brent) futures contracts dropped to $2.05 Monday (the smallest deficit in two weeks). Interestingly enough, this contraction comes on news that Enbridge Energy Partners have begun a “gradual restart” of their Line 6B pipe which has was shut down for a spill and subsequently curbed supply at US refiners. Another interesting point to make is that the difference between the current Nymex futures contract and that set for expiration in two years (the contango) dropped to $8.17 – a marked improvement the spread hit a 20-month high back on the 17th of $10.29. As for speculative interest, volume in the November futures contract dropped dramatically from its Friday record high (457,956 contracts to 270,713) while the COT net speculative long holdings report showed a 9 percent drop in through the week ending on the 21st.
Crude Futures Chart (240 Minutes)
Chart generated usingFXCM Strategy Trader
Commodities - Metals
Within Reach of $1,300 and Yet Investors are Taking Their Time with Gold
Spot Gold - $1,294.35 // -$1.60 // -0.12%
After week of consistent gains to fresh record highs, spot gold finally put in for a correction Monday. The timing of this pull back is particularly meaningful. While a week of steady advance certainly taxes the speculative stability of the market, the correction is far more interesting in that it has happened just below $1,300. Already at record highs, investors need mile markers with which to gauge conviction. Without historical precedence to work with, we defer to round psychological figures and momentum itself. The eight-weeks of consistent advance from this metal is almost unheard of; but this is also a meaningful argument for an overdue correction. Will gold automatically abandon its steadfast drive in reverence to an even number? Unlikely. In fact, the presence of such a remarkable level will likely attract a speculative rush of bids as opportunists and long-term investors alike attempt to trigger a potential wave of entry (or stop) orders set above this figure.
For fundamental guidance Monday, a slight pull back in risk appetite was as influential as the S&P 500’s rally this past week: virtually ignored. However, an indirect impact would be felt through the US dollar. Gold is one of the favored alternatives to the traditional fiat asset class and in particular is an attractive substitute to the greenback. With the advance from the currency today, we would see only a correction as the current of speculative appetites ebbed. There is still considerable overhead for the dollar to overcome before it is back on a bullish pace. Furthermore, there was a constant pressure to be noted on the traditional fiat. Today, the Fed bought another $36 billion in two-year Treasuries to flood the market with dollars and further distort the financial system. What’s more, Brazil’s Finance Minister, Guido Mantega, drew a critical assessment of the foreign exchange market by suggesting to many central banks were embarking on competitive intervention in order to lower the value of their own currencies. In response to this perceived threat, Mantega said he would be buying up “excess dollars” in the market. With this blatant manipulation, it shouldn’t be too surprising that investors are concerned. Going forward, talk over European debt will likely grow in clout as a primary driver. While the ECB reported buying only 134 million euros in sovereign debt this past week; but come this Thursday, European banks will see 225 billion euros in 12, 6 and 3-month loans from the ECB come due.
Looking more specifically at gold flows, the World Gold Council noted today that the IMF and central banks sold only 94.5 tons in the year through the 25th. This was the smallest sale since 1999 within the period when limits were imposed on annual sales. For speculators, we note that the COT report for the week ending September 21st marked a modest 238-contract decline to 244,013. At the same time, gold holdings by ETFs slipped modestly for a third day from record highs to 67.112 million ounces.
Spot Silver - $21.42 // -$0.03 // -0.12%
After Friday’s remarkable $0.32 (1.5 percent) rally, it isn’t really surprising that silver would curb its momentum Monday. Having just tested 30-year highs, the metal can run on its own momentum and seek justification for a continued advance (closing a perceived value gap with gold or advancing on risk appetite) where it needs. In the meantime, ETFs are holding are just at record highs.
Spot Gold Chart (Daily)
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