Risk appetite continues to swing between On and Off - Weekly Commodity Update

Investors had a difficult week as commodity markets failed to show a unified approach leaving most markets range bound. The overall question is still how much risk willingness is out there.

The energy sector had a mixed week with Crude Oil rallying almost 10% from the low point as a big draw in U.S. inventories sent investors scrambling to cover established short positions, only once again to be met with strong resistance at the top of the current trading range.

The biggest weekly drop in U.S. Crude inventories since May 2008 saw prices rally strongly as the drop was interpreted as the first sign of demand picking up. A few more weeks of similar draws will have to be seen to convince a sceptic audience that consumption indeed has turned the corner and has finally begun to rise.

One of the reasons behind the strong rally is based on the fact that investors had been selling Crude looking for a correction to the mid to low sixties and the inventory news forced a lot to cover short positions. The equally strong resistance between $74.30 and $75.30 indicates that we should continue to see the market range trade for a while longer. Look for support on the October futures contract at $70.00, $67.40 and $64.80 with the latter being trend line support from the February lows.

As we approach the September and October months which psychologically are worrying months for equities we could see money flowing away from riskier investments. We continue to see the price of oil in the mid to low sixties at year end but for now risk appetite and stable equity markets leads the way.



The Dollar will play its usual important role having weakened again this week as the S&P 500 recaptured the $1,000 level. The Japanese Yen is worth keeping an eye on as it is an important measure of risk appetite. A weaker Yen especially against the Euro is generally viewed as being an indication of increased appetite for risk. The chart above shows the strong correlation between the two.

Natural Gas prices sank to a seven year low with the spot month of September dipping below $3 having fallen 11 trading days in a row. This happened amid concerns about a supply glut as we approach the winter heating season. Production has continued to increase at a time where demand from industrial users has been weak. On top of this the relatively mild summer has reduced the use by private consumers.

Gas stocks are feared to reach record levels above 3,800 bn cubic feet by the start of the winter raising concerns that the U.S. could be facing storage capacity problems. So far the spot month has taken the brunt of the selling with the spread to the winter month contract of January 2010 having reached $2.42. This means that prices are currently expected to rise by 83% over the next five months for, something that seems unlikely given the current supply forecasts.

Technically the market is now into oversold territory and the risk of snap rebound is getting closer, however given the above reasons that would probably be met by new selling. As the September contract expires next week attention will turn to the October contract which currently trades around $3.3.

Gold continues its listless trading following the ups and downs of the dollar. The month long trading range leaves it with a decreased room for maneuvering and once the break out occurs I would not expect too much fireworks.

The current trading range on spot Gold is $928 to $977 and given the time spent in this range I doubt a break out would result in a major change. On that basis I will be looking for support at $928 and $905 while resistance can be found at $960 and $977.