While broad equity markets have remained in a holding pattern this morning, it appears that the energy sector may have reached a significant turning point. While commodities had been soft across the board early in the morning, natural gas started to rally, gaining over 5.6% and breaking through the key $8/mmbtu level. Although this move may have been due to concerns about a potential hurricane moving toward the Gulf of Mexico, other commodities started to follow gas higher, which suggests that a decisive shift in sentiment toward commodities may have occurred. For example, crude oil, which had declined toward $113/bbl, has staged a significant upward reversal, breaking through $115/bbl and rallying to test $117/bbl with next resistance closer to $120/bbl. In addition, gold and silver, which had been soft early in the day, appear to have successfully tested $800/oz and $13/oz, respectively, and have started to post moderate gains.

At this point, base metals and grains remain in negative territory, with copper down 2.4% and wheat down 3.0%, but with grains having advanced last week, it appears that the recent commodity price correction may have reached its final stages and the process of base building may have commenced. Moves by crude oil through $121.50, a key support/resistance point and copper through $3.50/lb may be needed, however, to indicate the start of a new recovery trend for commodities.  

Investors should note that a significant aspect of today’s energy commodity rebound is that it seems to have been accompanied by a broad-based rally in the share prices of energy producers and service companies, which tend to lead energy commodity prices. In the U.S., gains have been led by natural gas such as Anadarko (NYSE: APC, Stock Forum) up 6.5%, EOG Resources (NYSE: EOG, Stock Forum) up 5.9%, and Devon Energy (NYSE: DVN, Stock Forum) up 3.9%. Other producers moving up today include Range Resources (NYSE: RRC, Stock Forum) up 7.0% and Noble Energy (NYSE: NBL, Stock Forum) up 4.8%. Refiners also appear to have attracted renewed interest with Sunoco (NYSE: SUN, Stock Forum) up 4.4% and Tesoro (NYSE: TSO, Stock Forum) up 3.3%, possibly responding to a recent increase in crack spreads that suggests refinery profit margins may be improving. In Canada, leading energy advancers today include Iteration (TSX: T.ITX, Stock Forum) up 3.2%, Trinidad (TSX: T.TDG, Stock Forum) up 3.1%, Birchcliff (TSX: T.BIR, Stock Forum) up 2.1%, and Oilexco (TSX: T.OIL, Stock Forum) up 1.8%.    

This turnaround in energy share prices suggests that investors may be starting to anticipate higher energy commodity prices this winter. For example, Anadarko, which had been trending lower through July, appears to have turned the corner in recent weeks, and is currently testing $62.50, a former support level, but could continue to trend toward a retest of resistance near $67.50. Suncor, meanwhile, appears to have attracted support near the $40.00 level and could move to retest resistance in the $46.00 to $49.00 area. 

Canadian share update: Bank earnings week starts with a thud 

Canadian banks have been sliding this morning after the Bank of Montreal (TSX: T.BMO, Stock Forum) started off earnings week on a disappointing note, reporting EPS of 98 cents for its July quarter, well short of the $1.20 investors had been expecting, and loan loss provisions soared. The bank boosted its loan loss provision this quarter by $484 million due to weakness in the U.S. housing market, which cost $247 million, $187 million in other provisions, and $50 million in general provisions. This appears to have raised concerns that even banks with reduced U.S. exposure may report higher loss provisions. In early trading, Bank of Montreal has fallen 1.8%, while CIBC (TSX: T.CM, Stock Forum) and Royal Bank (TSX: T.RY, Stock Forum) have fallen 1.4%. Note that Bank of Nova Scotia (TSX: T.BNS, Stock Forum) is scheduled to report later today, bringing the possibility that the winds of sentiment could shift again. 

This commentary is based upon technical analysis. Technical analysis is the study of price and volume and the interpretation of trading patterns associated with such studies in an attempt to project future price movements. Technical analysis does not consider any of the fundamentals of an underlying company, and as such is inherently uncertain and should not be the only factor considered by an investor in making an investment decision. 

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