Friday Would Show an Unexpected Mix: A Rally for both Crude and Oil

It is much easier to do our fundamental analysis when cross-market correlations are high and the very different assets respond to the same underlying fundamentals concerns. That was not the case however for the commodities market Tuesday.

North American Commodity Update

Commodities - Energy

A Rise in Chinese Manufacturing and US Consumption Fuels Oil's Rally

Crude Oil (LS Nymex) - $81.58 // $1.61 // 2.01%

US oil wouldn't let up off the accelerator into the close of the week. The benchmark WTI continuous futures contract climbed for a third consecutive session at a fresh seven week high. Just off early August's $83 swing high, energy traders will have something to shoot for should momentum carry over to the open of a new trading week. As it is, the period of daily gains through the second half of this past week has covered 7.3 percent and bolsters the performance of the entire week up to the best run since February. What is interesting, however, was that there was a notable lack of market-wide risk appetite to support this move. While there is an economic component of this market, the speculative side certainly has just as much (if not more) influence on price action. This being the case, a sustained move will come under increased scrutiny if equities and other growth-dependent assets don't follow.

In the meantime, fundamental traders have been happy to drive the commodity higher through positive adjustments to supply-and-demand factors. The rally was recatalyzed early in the morning hours thanks to the positive outcome of the Chinese manufacturing PMI reading for September. As the world's largest energy consumer, an uptick in factory activity bolsters consumption expectations - especially when the market is already prone to positive expectations. Through the European session, there was little deviation from the advance; nor was there much in the way of volatility. Readings of German retail sales, Eurozone unemployment and UK home equity withdrawal apparently have a muted influence over expectations for European expansion and therefore energy demand. The US docket was a different story. On the one hand, the ISM's national assessment for manufacturing from the world's largest economy unexpectedly slipped to its weakest reading in 10 minutes while new orders and production actually dropped to lows not seen since June of last year. This is a direct blow to the forecast of energy demand. That being said, there was offset in the pickup in consumer activity with personal spending and confidence readings picking up. In the end, we can say the markets were picking and choosing scheduled event risk; but more likely, this drive was self dependent and ignorant of data.

In terms of speculative market activity, we aren't seeing evidence that this advance is exceptionally prone to exhaustion and reversal. Looking at November futures' volatility reading, we see that the 338,000 contract turnover is not exceptional when compared to the previous sessions or even previous weeks. At the same time, aggregate open interest has hit its highest level since May 19 th and the COT figures show net speculative long interest through the week ending September 28 th surged 10 percent to 116,906 contracts.

Crude Futures Chart ( 240 Minutes )

Chart generated using FXCM Strategy Trader

Commodities - Metals

A Strong Week-End Swell for Gold Comes Via a Sharp Tumble for the Dollar

Spot Gold - $1, 319.10 // $1 0.75 // 0.82 %

On any given day these past two months, we could expect that if gold was not up day over day then at least it was maintaining its bullish trend. The precious metal would do more than that into the close this week. Friday's rally was another aggressive push to record highs just below $1,300. For some background, this upswing from July's swing low has measured 15 percent and is the strongest and most consistent move since the run in the final quarter of 2007. Furthermore, in the past 23 months, this commodity has posted 15 monthly gains and rallied 87 percent. Momentum is the most important factor behind this market.

Refocusing our view to Friday's session, it was clear that the same forces that have kept gold on its bullish bearing were still at play. While there is a notable taste for risk in fundamentally unsound assets across the market, there is still a consistent influx of investor capital into the welcoming arms of this particular metal for its appeal as an alternative to risky assets and even fiat stores of value. The dollar was the session's particularly catalyst. The greenback tumbled to a fresh eight month low with authority and this would encourage investors that were perhaps in Treasuries or some other safe asset type to the currency immune asset. That being said, next week's fundamental backdrop will likely impart volatility on gold. There is a dense round of Fed commentary scheduled which could play into speculation of stimulus expansion which necessarily alters the flow between gold and the dollar. Of further interest, we have NFPs for risk appetite trends and a serious of interest rate decisions which will be more interesting for their effect on expansive monetary policy than they will be for gauging distant interest rate expectations.

Looking at activity levels in the market, we see that the December expiry futures put in for tepid turnover of approximately 101,000 contracts. Volume on this market has been excessively volatile and neither conducive nor detrimental to a sustained trend in the underlying. From a different, note that the net long holdings of the speculative group coming from the COT report shows a 6 percent increase to 257,649 contracts. This is just 1.8 percent off a recent record high. Also, ETF holdings of gold (a sign of speculative interest) slipped Friday; but the 67.355 million ounces held is just off Thursday's record.

Spot Silver - $ 22.11 // $0. 36 // 1.63%

Silver has been a stand out performer this week and these past two months. The metal put in for another hearty gain Friday to close above $22 for the first time in 30 years. Momentum is exceptional for this particular market. From the August 24 th launch of the current bull trend, silver has rallied a remarkable 24.9 percent. It is fair to say that both speculative appetites and a desire to close a perceived value gap between this metal and gold are responsible for keeping this market on pace. But, how long will that hold up? Considering ETF holdings reached another record high of 442.05 million ounces, it is likely a factor of where investors will capitulate. In the meantime, aggregate open interest for futures hit its highest level since March 2008 (152,540 contracts) and the net speculative long interest reading from the COT grew 4 percent to its highest level since February of 2008 (51,481 contracts).

Spot Gold Chart ( Daily )

Chart generated using FXCM Strategy Trader

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Written by John Kicklighter , Strategist

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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