Market still wants Oil and Gold

Oil prices ($96.86) have pared some of their losses after weekly EIA data reported an unexpected -1.37m barrel decline in inventory. Crude prices have been under pressure throughout European and North American sessions due to the political upheaval occurring in Italy. Capital markets are concerned that Europe’s debt crisis may spread, curbing fuel demand as regional economies struggle to recover.

Because Italian yields have imploded, due to the lack of political and economic confidence in the country, has the dollar in demand. This is again putting the “dollar denominated commodity sector” under pressure. With Europe’s third largest economy in trouble there is a global fear that Europe could u-turn back to a recession. However, strong seasonal fundamentals and concerns about a rising dispute over Iran’s nuclear program should be able to provide some support for the commodity on any pullbacks.

Last week’s EIA report showed that crude inventories fell for a second consecutive week by -1.40m barrels to +338.1m, but remains in the upper limit of the average range for this time of year. Not to be left behind, gas stocks plummeted by -2.1m, one week after rallying +1.4m, and are in the middle limit of the average range. The market had expected both crude and gas inventories to rally by +1m and +1.5m respectively. Other data showed that oil refinery inputs averaged +14.3m barrels per day during the week, which were -358k below the previous week’s average as refineries operated at +82.6% of their operable capacity. US crude imports over the week averaged +8.6m barrels per day, down by -336k. Over the last four weeks, imports have averaged +8.7m barrels per day, which were +34k per day above the same four-week period last year.

With an Italian inverted yield curve, a German think tank concerned about its own domestic growth, should be bringing some sellers back to the market hoping to stagger their sales on rallies.

Gold ($1,792) is tentatively edging higher on persistent doubts about Italy’s ability to tackle its debt crisis as political uncertainty and soaring Italian bond yields prompt caution amongst investors. This week the market is back to wanting to own some of the “shiny metal” as a safe haven investment away from market turmoil. Last week, the metal buckled under pressure from the dollar. This time, there is more of a risk aversion type dynamic developing because of all the complications surrounding Europe. Any political or macro uncertainty is promoting risk aversion trading strategies.

Investors have been using the commodity as a safe-haven alternative to equities or FX. Individuals seem to want to insulate themselves from steeper price falls. The bullion is in its eleventh-year of a bull market and has rallied more than +11% since the end of September.

Bigger picture, the commodity has also found support on concern that US monetary policy aimed at shoring up growth will eventually spur inflation. With global sentiment in the fragile category, gold remains the go to “safer-haven” prospect. If we include the demand for ‘physical’ gold from India, then both of these reasons should provide the strongest tangible support to want to own some on these pullbacks. Retracements and corrections are possible even as the market ties to breach the psychological $1,800 barrier with conviction.

Other Links:
Risk Aversion requires lower US Yields
Italian Bonds Encourage Market Madness