Commodities: crude lower as oil stocks unexpectedly build, gold flat ahead of FOMC

Today’s big risk event is probably the outcome of the FOMC meeting and the corresponding press conference from the Fed chairwoman Janet Yellen. Unless the Fed delivers a hawkish message, the dollar remains in danger of giving back a big chunk of recent gains. If so, this could underpin some of the dollar-denominated commodities, in particular gold and silver while crude oil could also find some support from this source.

In fact some of the recent economic data suggests the Fed may disappoint the USD bulls, with this week’s release of inflation and industrial production data, for example, both coming out surprisingly weaker than expected. Today we found out that the CPI actually fell by 0.2% in August, which confounded expectations for a 0.1% increase. Core CPI was flat, also missing forecasts. Thus judging by the weaker price pressures, and last month’s below-forecast jobs growth, the Fed may after all decide to keep the pledge to hold interest rates low for a "considerable time" in the FOMC statement. Apart from the effect of the US dollar, there are also other factors affecting the price of commodities.

Crude oil has found decent support this week as speculators not-so-surprisingly reduced some of their bearish positions as Brent and WTI prices reached key technical levels. According to the ICE and CFTC, net long positions in Brent and WTI were expanded by around 8% each in the week to 9 September. Given the price recovery since, net longs are likely to have increased further. However, with oil production continuing to increase and demand remaining subdued, prices may well struggle to sustain the rally. According to the US Energy Information Administration, crude stocks in the week ending September 12 increased by a good 3.7 million barrels. This was an unexpected build and is the most significant one since April, suggesting weaker demand for oil last week. Meanwhile Libya’s oil production is continuing to return to more normal levels, which is adding to the already-saturated market. So far, the OPEC as a whole has resisted cutting production with the exception of Saudi who trimmed their output by a good 400 thousand barrels per day last month. Given that the call on OPEC has been reduced as a result of increased non-OPEC supply, and that the cartel meanwhile continues to produce more than the agreed 30 million barrel per day quota, oil prices, particularly Brent, may have to fall further in order to balance the market.

But as I reported at the start of the week, the technicals have improved recently and so oil prices may push higher in the short-term before possibly falling once again. Meanwhile, gold has been coming under increased pressure following the break of the key $1240 level and the subsequent rejection of the rally there yesterday. As a result, a cluster of stop loss orders are likely to have been built up above the $1240 area and these may get triggered tonight if the FOMC delivers a dovish message. If so, gold prices may stage a short-covering rally. Otherwise, the long-term 78.6% Fibonacci level at $1227 could be a temporary stop ahead of $1210/12 where a couple of other Fibonacci extension levels converge (see chart for details).