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Oil Rallies along with Risk Appetite, Gold with Stimulus
Written by article default Thursday, 14 October 2010 03:56
North American Commodity UpdateCommodities - Energy
Chinese Demand and a Rally in Risk Appetite Carries Crude Towards Fresh 5 Month Highs
Crude Oil (LS Nymex) - $83.68 // $1.34 // 1.64%
It was a strong return to form for crude Wednesday. The commodity started its climb at the turnover of the day; and it would continue to climb throughout the Asian, European and US sessions. This climb wouldn’t lead to a new-five month high close for the US oil market; but the rally has the level of momentum that is usually attributable to trend generation. The question of progress from here rests with fundamental support. Wednesday, there was a combination of factors that would encourage a rally, including a swell in risk appetite, drop in the US dollar, and data that gives a meaningful rebalancing of the supply/demand balance. However, the permanence of these factors is certainly questionable.
First and foremost on the day was the encouragement the energy market would find through demand and supply readings. From demand, the IEA would offer a promising forecast in its monthly Oil Market Report that bolstered the average daily demand level for 2010 to 86.9 million barrels per day through the end of 2010 and 88.2 million barrels per day next year. At the same time, the US Energy Department’s price forecast for 2011 would be raised a dollar to $83.00 to reflect a recent advance in prices. For traders, these demand forecasts are often considered flimsy as they are open to significant revisions as the year progresses. A little more objective in its impact on consumption was the Chinese economic data. Though the September trade balance dropped more than expected to $16.8 billion, imports hit a record with oil purchases specifically surging 11 percent to a record 23.29 million tons. On the other side of this equation, the API’s industry-based inventory figures showed the biggest drop in crude oil holding (4.1 million barrels to 362.1 million) since July. We will see if this will be matched by tomorrow’s Department of Energy figures.
Another side of crude’s rally can be attributed to risk appetite itself. The S&P 500 climbed as high as 1.3 percent through the session; and though it would fall back into the afternoon hours, the benchmark index would still set its highest close in five months. This latent strength can be partly attributed to the hope of return-stoking stimulus after the FOMC’s dovish minutes yesterday; but the more appropriate driver through the previous session can be traced back to the start of the 3Q earnings session. A stronger than expected revenue forecast from Intel and a 23 percent increase in 3Q profit for JPMorgan suggests return is still there.
For trading activity, volume on the December contract rose a modest 3 percent to 189,991 contracts. This is still above the monthly average (169,000) but it is far from highs. Futures traders should take note that the Brent contract will soon rollover.
Crude Futures Chart (Daily)
Commodities - Metals
Gold Soars to a Fresh Record High Despite a Taste for Risk
Spot Gold - $1,372.15 // $21.80 // 1.61%
Not long ago, we would expect a rally in risk appetite to be met with an immediate selloff in gold. However, that is not the process for the precious metal nowadays. No longer is gold a direct alternative to the traditional capital asset that is highly sensitive to volatile investor optimism trends. Instead, the commodity follows the underlying health of the economy and financial markets – making it perhaps one of the best asset-based barometers out there. For performance, gold surged to a record high Wednesday with the second sharpest daily advance in a month. This was a big exclamation point on an already remarkable trend. How long can this drive continue unfettered, especially when it goes through periods of acceleration?
Gold’s performance Wednesday is perhaps most confusing because it would contradict the simultaneous rally for the S&P 500 to a fresh 5 month high. It is true that the commodity is a traditional safe haven asset that has been sought after when investors are avoiding other asset types that are dependent on economic growth and yield to keep pace. However, we review the fundamental backbone of the climb for equities, corporate debt and other speculative commodities; optimism is based on the promise of revenues and return that develops without meaningful economic growth. This is a contradiction on terms that these assets should appreciate when yields aren’t expected to grow, investment remains week and consumption for revenues stalls. Those investing in gold recognize this disconnect and are looking to take advantage of the metals capital gains and its safe haven properties. Adding to the doubt in capital market’s advance and the eventual wholesale demand for gold, Tuesday’s FOMC minutes will keep speculation of a Fed stimulus hike come November 3rd burning. Furthermore, we saw BoJ Governor Shirakawa revive his rumination of introducing a new effort to buy assets that would span from JGBs to ETFs. And, just for a speculative angle on the action, Bloomberg would report that China was considering adding gold to its reserves – not an unreasonable plan considering its FX reserves hit a record $2.648 trillion.
For trading activity, we note that volume on the December Comex futures contract jumped 25 percent to 169,381 contracts – though this turnover is not particularly remarkable given recent activity levels. For ETF’s, holdings drop 0.1 percent (44,675 ounces) to 67.03 million ounces. This is approximately 420,000 ounces off the record set back on September 30th.
Spot Silver - $24.00 // $0.67 // 2.85%
With both risk appetite and gold rallying, silver would certainly leverage the opportunity. The precious metal easily cleared recent congestion and forged new 30-year highs. For performance this is the fourth-consecutive daily advance; but volume is still well off the highs of last Thursday and Friday. It should be noted that the gold/silver ratio is at its lowest level since August of 2008. Many believe much of silver’s strength can be attributed to an effort to close a value gap to gold. If this is the case, we may see this drive let up in the near future.
Spot Gold Chart (Daily)
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