http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/commodities/2011/01/07/Crude_Oil_Sinks_as_WTI_Disconnects_from_Other_Benchmarks_Gold_Grinds_Lower_as_Economy_Strengthens.html
Commodities – Energy
Crude Oil Sinks as WTI Disconnects from Other Benchmarks
Crude Oil (WTI) - $88.87 // $0.49 // 0.55%
Commentary: Crude oil fell $1.92, or 2.13%, to settle at $88.38. The WTI discount to other crudes grew even wider as Brent only fell $0.98, or 1.03%, to $94.52, while LLS fell $1.17, or 1.2%, to $96.13. At $6.14, WTI’s discount to Brent is the widest since late 2008/early 2009, when it got as large as -10.67 (a record).
In terms of crude oil generally, we can attribute the latest move to a small amount of profit taking as traders wait for more clarity on fundamentals before a potential test of $100 later this year. WTI has to deal with the added burden of a glut at Cushing. There is limited opportunity for arbitrage between crude delivered to the landlocked NYMEX delivery point and other light, sweet crudes. What is interesting is the fact that crude levels at Cushing near ~37 million barrels are still well below the ~55 million barrels estimate of total storage capacity per the EIA. But that only impacts calendar spreads, which are relatively well-behaved compared at ~$1 versus the ~$4+ spreads we’ve seen in the past. Differentials between other crudes looks more like a structural imbalance between the region’s supply and demand with lack of takeaway opportunities.
For those seeking long crude oil exposure, we would gravitate toward Brent. It is more representative of global supply and demand and the structure of the forward curve (slight backwardation vs contango) is friendlier to long positions.
Technical Outlook: As we suspected, yesterday’s advance proved corrective, with prices dropping back to support at the 38.2%Fibonacci retracement of the 11/17/10-1/3/11 rally ($87.80). Continued selling from here will target the 50% Fib at $86.32. Near-term resistance lines up at $89.63, the 23.6% level.
Commodities – Metals
Gold Grinds Lower as Economy Strengthens
Gold - $1370.82 // $0.78 // 0.06%
Commentary: Gold fell for a fourth day, shedding $6.72, or 0.49%, to settle at $1371.60. An excerpt from this week’s Gold – FOREX Correlations report:
“The theme this week was strength in the U.S. economy. We saw the ISM non-manufacturing index reach its highest level since 2006, while the ADP employment report show a massive 297K increase in the labor force for the month of December. The greenback took its cues from these data, rallying sharply in response.
With that said, we don’t think it is the dollar rally per se that has caused gold weakness. Rather, the rapid strengthening in the U.S. economy has accelerated the timeline for when the Federal Reserve will begin to unwind its extremely loose monetary regime- including its zero interest rate policy- in our view. This may seem like an odd statement considering that the central bank is currently engaged in a massive $600 billion quantitative easing program. But just as downturns in the economy are difficult to foresee, so are the upturns. This is why QE2 was designed as a flexible program. If the labor force begins to quickly strengthen in step with the rest of the economy (nonfarm payrolls are due out later today), the Fed may reverse course swiftly.”
Technical Outlook: Prices appear to have narrowly taken out trend line set from late October, reinforcing the likelihood of a triple top at $1424.60 and exposingthe 38.2% Fibonacci retracement of the 7/28/10-12/7/10 advance at $1326.50. Prices closed just barely below support however, hinting that a head-fake remains a possibility until it is confirmed by bearish continuation on the current candle. An upswing from here sees initial resistance at the $1400 figure.
Silver - $29.00 // $0.09 // 0.31%
Commentary: Silver fell in step with gold on Thursday, settling at $29.09, down $0.17, or 0.58%, on the session. Silver ETF holdings have been flat for the last two weeks near 485 million troy ounces.
The gold/silver rose to 47.3, rebounding from December’s four-year low at 45.95. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance, while a lower ratio indicates silver outperformance).
Technical Outlook: Prices has continued lower after taking out support at the bottom of a bearish Rising Wedge formation set from early November,will sellers still targeting the 23.6% Fibonacci retracement of the 8/24/10-1/3/11 rally at $28.05. The wedge’s lower boundary (now at $29.89) remains as near-term resistance.
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