Crude Leads the Way as Investors Take More Risk

Many commodity futures markets have recently hit multimonth highs. The recent move back into the commodity markets by investors and traders reflects an increase in risk appetite. The slumping U.S. Treasury markets (higher yields, lower prices) also suggest that traders and investors are growing weary of little to no return on investments.

Some of the money coming out of the safer U.S. Treasury markets and off of the sidelines has moved into the stock market, as the recent stock market rally bears out. But after the beating they took in the stock market over the past 18 months, many investors are now seeking alternative investment avenues. That means a lot of cash that was on the sidelines or sitting in U.S. Treasuries is now flowing into commodity futures markets -- on the long side.

Several commodity futures markets that have rallied strongly recently arguably do not have the supply-and-demand fundamental backing to justify such price appreciation. Crude oil stockpiles in the U.S. are at the highest levels in over a decade, yet prices this week hit a fresh 5½-month high. Cotton and wheat futures markets are pushing higher and this week also hit multimonth highs -- despite their own market supply-and-demand fundamentals that cannot be considered bullish.

The recent rallies in the aforementioned markets strongly suggest it's presently a "money game" in the commodity futures markets, similar to what was seen during the first half of 2008, when many futures markets established new all-time record highs. Simply put, speculative money is now flowing into the commodity markets as investors seek out higher returns -- and seemingly ignoring the supply-and-demand fundamentals of those markets.

Weekly Chart: Nymex Crude Oil Futuresource.com and Tradingeducation.com

An interview of a crude oil trader in the Nymex futures pit this week provides some anecdotal evidence. When asked by the reporter if crude oil prices would be pressured by the historically high crude oil inventories in the U.S., the trader replied that crude oil is not following its own fundamentals at present -- price is only being driven by the charts, which show an uptrend.

Heightened inflationary concerns are also driving the commodity markets higher after months of the U.S. government pumping billions of newly printed dollars into the financial markets. Economics and history do suggest that any attempts by the government to "monetize" its debt burden are a harbinger of price inflation.

Crude continues to be a leader for most other commodity markets. Remember that such was the case during the major bull market runs seen in early 2008. If crude oil prices continue to trend higher, most of the commodity markets will follow along for the ride. If and when crude oil futures prices start to back down, most other commodity markets will probably do the same. All traders need to continue to keep one eye on the crude oil market.

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Know what you own: Major companies in the oil industry include ConocoPhillips (COP - commentary - Trade Now), ExxonMobil (XOM - commentary - Trade Now), Chevron (CVX - commentary - Trade Now), BP (BP - commentary - Trade Now), Marathon Oil (MRO - commentary - Trade Now), Shell (RDS.A - commentary - Trade Now) and Total (TOT - commentary - Trade Now).

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Jim Wyckoff is a senior market analyst for TradingEducation.com a free educational Web site. In addition, Wyckoff writes a blog offering current market commentaries every morning on TraderBlogs.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Wyckoff appreciates your feedback; click here to send him an email.