Monday, October 12, 2015

Oil Comparison with Commodity Index (BCOM)

Last week, investors traded on a positive group psychology with many stocks experiencing eccentric support from buyers across the board. Most sectors grew for at least four out of the five days with Friday ending a bullish streak with some consolidation. The Dow Jones Industrial Average repeated that same movement today with a confirmation of gains at 17,120 and a positive change of 0.25% today. The S&P 500 and the NASDAQ indices sought to maintain price levels as well with parsed gains of 0.10% and 0.18% respectively. The Russell 2000 small cap stock index fared a little worse posting losses around -0.17% as an economic recovery continues its fragile course. Even as asset prices appear to be shakier, the volatility index dropped -5.15% upholding a substantial 5-day decline of -22.68% as it approaches its 52-week low of 10.88. The Dow Jones Transport Index performs rather neutrally today with a small 0.03% climb, but it continues to outperform the industrials in the short-term. Overall, the main market indicators show a week deviating from the forces of last week. Supply and demand powers seemed to have reached an equilibrium point where traders are looking for a fundamental change to push weight behind either movement. On the NYSE and NASDAQ, advancing and declining securities balance each other out as the week starts. Momentum appeared to be muted by a lagging energy sector which reacted to a drop in oil prices as well as a production report from OPEC. This comes as lost weeks gains were supported by a surging energy sector and bullish movement in WTI and Brent crude oil prices. The gains might have been short lived as futures contracts have WTI and Brent oil losing -4.43% and -4.35% on their spot prices reducing 5-day trading gains to 4.13% and 3.73%. These losses came after OPEC reported that member production had reached a three-year high as monthly production increased 1.57 million barrels a day over the target of 30 million. This may appear atypical of the cartel which has constantly desired to keep high global oil prices, but with the war for more market share and revenue, member prices are unlikely to ease up on production in the near future. The absence of an OPEC meeting, as well as Saudi oil price cuts, has discouraged investors looking at the cartel for quotas to relieve the ailing crude oil prices. We could see more bearish volume on the futures exchange when traders banking on quota installations abandon their assertions that OPEC will fall back to their track record. At the same time, Iraqi oil on the market looms in the back of Brent traders as supply gluts have the potential to increase. European stocks responded to the deflationary pressure like the U.S. markets. With Brent falling, the Stoxx Europe 600 edged lower at -0.28%. Also characteristic of today, government debt prices increased and yields dropped as investors move towards safer assets as hedges against possible losses.

WTI Comparison With Bloomberg Commodity Index

Lately, a lot of talk around the commodities market has been centered around the crude oil plunge and the supply glut. As one of the most important global products, it may deserve that spotlight, but that doesn't mean that the overall commodities rout should be ignored. As crude's price hovers at about half its previous year's price, precious metals, agriculture, and other various groups of commodities have experienced volatility from the recent economic contraction as well. It may be useful to compare an index with the WTI and Brent crude prices to see how bad petroleum is really performing. In the chart above, WTI and the Bloomberg Commodity Index have been plotted together for comparison. This index was chosen as the futures market "average" because its components cannot be weighted more than 33% at any time. Therefore, this ensures that energy products are not dominant in deciding movement. The purple line shows WTI movement as the black line represents that Bloomberg index (BCOM). Looking big picture (on a one-year time scale). one can clearly see the significant decline in commodity performance. The red and blue arrows follow the general direction of the two charts. The arrows mostly coincide showing a lot of similarities which is too be expected as crude oil price is included in the basket index that it is being compared too. Through the beginning of the oil supply glut, crude oil along with its counterparts on the futures market performed very poorly. Going into 2015, the economy was looking at a drop in inflation that could endanger the struggling labor market. Through April, crude oil and the Bloomberg index moved together with WTI doing considerably worse. The rest of the commodities appeared to be struggling from the immense amount of money leaving the domestic crude market. Companies who were too afraid to lose their low priced hedges prepared for even lower prices. The WTI rebound midway through the year allowed the establishment of long positions and subsequently trading at the top around $64. BCOM entered a slightly bullish consolidation trend. Its gains were hindered by the continuation of  lagging commodities. Throughout the summer, both fell as the global weakness produced worries of la stronger dollar hurting exports for the United States as well as overall demanding being questioned as China slowed down. As the third quarter ended and the fourth began, oil prices quickly jumped ahead of BCOM with the jump in September more pronounced than the basket index. Why is that? Perhaps there is more downside pressure from the economic environment. WTI price might be gooing through a period of fundamental readjustment where the recovery is stemmed by glut implications. The bullish bounce has not been confirmed as robust and may be long positions being established and sold in the short term. Either way, money is moving into the energy commodity as shown by the money flow indicator. It could be that a crude oil move was supported by more volume and speculation than other commodities that attempt to weather out the storm of low inflation. The futures market as a whole should be looking for the Fed to stay on top of a 2% inflation target and fight for labor market strength. Strong communication for Yellen might mitigate anymore losses from crude in and commodities in BCOM.

On a side note, this weekend is fall break for mysemester, and I have been reading an excellent book fresh off the press. Ben Bernanke's The Courage to Act is a great piece on monetary policy during the financial crisis in 2008. Not only is it an investigation of the Federal Reserve's actions during the crisis, but it provides refreshing analysis of the psychology behind the Fed's communications. For investors today, it might shed some light on the failures of Yellen's attempts to clarify her idea's on monetary policy and why the markets are responding to her so viciously.

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