Crude oil rose 4% this past week, as the commodity took its cues from rebounding equity markets. A fairly uneventful economic calendar allowed for a bit of optimism, with some traders speculating that any potential economic slowdown had already been priced in. Peak-to-trough, the S&P 500 fell nearly 17%, while oil fell 26.3% using the May 20th low and 18.4% using the more recent low put in this Tuesday.
The DOE crude oil inventory data was also released on Thursday, a day later than usual due to the 4th of July holiday. The government reported that in the week ending July 2, 2010, U.S. crude oil inventories decreased by 5 million barrels, gasoline inventories increased by 1.3 million barrels, distillate inventories increased 0.3 million barrels, and total petroleum inventories increased 0.4 million barrels. While the storage figures look bullish on the surface, they are very much in line with the 5-year average. Moreover, approximately 1.4 million barrels of production was shut-in last week due to Hurricane Alex; adjusting for the storm impact yields a 3.6 million barrel crude oil draw and 1.7 million barrels total petroleum build— figures which are slightly more bearish than the 5-year average.
Nevertheless, it has been quite some time since inventory figures had any lasting impact on crude oil prices. Storage is extremely high across the OECD, though the surplus is stable and not increasing. Crude oil prices have instead been at the mercy of the global economic outlook, as well as that of U.S. Gulf of Mexico output. The latter has been a bullish underpinning, while the former has presented a headwind in recent weeks. This tug-of-war has served to keep oil largely contained between $70 and $80. The evolution of the world economy and GOM production will determine whether prices can break free of this range.
Friday’s rally in oil took prices back above the 200-day EMA, as well as $75.50 resistance, though it seems that particular price has lost its significance as a technical level. Importantly, crude oil has been in an uptrend since putting in its lows in May, as the pattern of higher highs and higher lows remains unbroken. Barring another leg down in global equity markets, crude oil may continue toward recent highs near $78.50. On the downside, support is at $71.50 ().
Spurred by a bearish inventory report on Thursday, North American natural gas prices continued to sink, losing 5.8% this week. Bullishness over much warmer-than-normal temperatures has receded, while concerns about the structural imbalance between supply and demand are reemerging ().
Weather forecasts generally indicate above-normal temperatures across the nation, except in parts of the South. The densely-populated Northeast has been especially hot, which will undoubtedly lead to high levels of natural gas demand for electricity generation. Regardless, the weather will moderate by the end of August at the latest, which will allow storage levels to increase swiftly. Indeed, our base case forecast is for a record net injection in September.
Flows into gold ETFs continue at a steady pace, as holdings increased 181,112 troy ounces (5.6 metric tons) to reach a new record level. The fact that investors have not turned their backs on gold is encouraging and bodes well for an eventual retest or break of the all-time highs. In the near-term, however, another class of market participants—short-term and momentum traders—are now more cautious on the metal following last week’s breakdown. Reduced demand from this segment could keep things choppy. Gold got close to, but did not reach the initial support level between $1166 and $1177. Resistance can be found between $1210 and $1215.
The gold/silver ratio decreased to 67.00 from 67.84 last week, as silver reversed some of last week’s steep underperformance relative to gold. The ratio is well below the year ago level of 72.
Disclosure: Short UNG from $8.70