Crude Oil Extends its Strongest Rally Since October as the Dollar Settles, Inventories Contract

North American Commodity Update

Commodities - Energy

Crude Oil Extends its Strongest Rally Since October as the Dollar Settles, Inventories Contract

Crude Oil (LS NYMEX) -  $79.26  //  $0.29 //  0.49%

Unusually cold temperatures for the eastern United States, ongoing political turmoil and a steady rebalancing of supply-and-demand has maintained oil’s advance long enough to mark the commodity’s most consistent bull wave in over four months. While much of Wednesday’s progress was founded on the momentum in the impressive 16 percent-plus upswing of the past three weeks, there were additional fundamental components to keep the market elevated. Among the more pressing factors for speculators today was the Department of Energy inventory reports. Analysts were projecting a fourth consecutive decline in crude stores in the period through December 25th; and the realized contraction was notably smaller than the Bloomberg consensus. According to the government’s statistics, crude inventories fell 1.535 million barrels through last week. In similar fashion, stockpiles of distillate fuels dropped 2.06 million barrels and those for gasoline eased back 336,000 barrels. Altogether, the recent trend in supply is encouraging; yet at the same time, the overall level is still well above the average of the past five years. What’s more, demand is still well off the pace needed to put a fundamental backing to a speculative run back towards record highs.

However, despite the persistent imbalance between supply and demand in the post-recessionary market, we are seeing the influence that other fundamental factors can rouse through speculative channels. For a demand outlook, the Chicago ISM’s national business gauge for the US rose to its highest level since January of 2006. A jump in employment and new orders further supports hope that this improvement is not simply superficial inventory rebuilding. Then there is also the short-term impact that weather forecasts have been known to have on speculation.  Following up on the blizzard and unusually cold weather of the past two weeks, the Eastern seaboard is expected to suffer from atypically frigid temperatures for the next two weeks. Geo-political events are also playing their part. The international response to Iran’s crackdown on political protestors this past week casts doubt over the output of OPEC’s second largest producer.

Commodities - Metals

Gold Settles into the Year-End Along with the Dow and Dollar

Spot Gold  -  $1,093.25  //  -$3.59 //  -0.33%

Though volatility and speculative trends are holding up relatively well for some other markets; gold seems to be going the way of equities and the dollar by closing out the year quietly. Volatility and trading were very light through the European and US trading hours, with a daily range that measured a meager $11 for spot gold. Considering the state of the fundamental drivers that back this market, it comes as little surprise that gold bugs are unwilling to establish a meaningful trend. As a hedge to the US dollar, the metal is tracking an anchored greenback. The currency has turned to a pattern of congestion the past week as the bulk of position unwinding has already been run through before liquidity fully drained. As its capacity as a counterbalance for inflation, speculative interests have faded into the closing days of the year, leaving the iShares TIPS index to establish a temporary floor for its reversal from its 16-month high at 103.50. Finally, gold traders are looking to avoid the effects that a thinned market will have on price action. Like any other speculative asset, the precious metal is running on reduced leverage. Aggregate volume on the active futures contract was already pushing a four-month low to start the week and the CBOE Gold Volatility Index is holding just above the three-month average at 24.5 percent.

Spot Silver  -  $16.81 //  -$0.29 //  -1.70%

Another bearish push for silver sent the commodity to its lowest close since November 3rd. However, despite the nearly five-percent swing so far this week, the market is still carving a very conspicuous range (between $17.75 and $16.75 per ounce) that befits the general liquidity conditions for the market this week. For speculative interests, aggregate volume has plunged to lows not seen since the rollover from 2008 to 2009. Furthermore, the lack of fundamental cross winds from the dollar and gold offer longer-term investors and short-term traders little to work with.

Written by John Kicklighter, Strategist
DailyFX.com