Star of the week was obviously gold which broke out of recent broad trading range and set to resume the long uptrend with target above 1000. We find the rally impressive as the dollar remained range-bounded. While momentum looks strong, we would be more convinced that the precious metal will make new high above 1033.9 if a close above 1000 is seen.
We will have 3 central bank meetings in the coming week, namely RBNZ, BOE and BOC. While we expect no change in monetary policies, policymakers’ outlook on economic development and exit strategies from stimulus should provide guidance on currency and gold movements.
On the other hand, crude oil’s rally has lost steam after jumping to 75. Focus next week will be OPEC’s meeting, although it’s broadly anticipated that the cartel will not alter production quota. In coming months, crude oil should trade within a range of 65-75.
Crude oil was little changed Friday. Although surge of US unemployment rate to 9.7% dragged price down to 67.12, the benchmark contract managed to recover and closed +0.1% higher at 68.02. Over the week, the back gold dropped -6.5%.
After spiking to 10-month high at 75, crude oil has been moving downward and has lost almost -10% so far. We believe a temporary top has been formed there and price will continue to move with a range of 65-75.
The US Energy Department reported that crude inventory drew -0.37 mmb to 343.4 mmd for the week ended August 28. Gasoline inventory also dropped -2.97 mmb while distillate rose +1.18 mmb. Despite the lower-than-expected decline in crude and larger-than-expected increase in distillate stockpiles, investors did find some positives from the report. That is, a +4% weekly increase in gasoline demand. While this might be a sign of demand improvement, we would advise cautions in interpreting the data as retailers usually stock-up fuel before the public holiday on Monday. The surge in gasoline consumption can be just due to seasonality.
OPEC’s general meeting will be held on September 9 in Vienna. The cartel controlling the world’s 40% of oil exports looks satisfied with the current oil price and is likely to keep production target unchanged at 24.845M bpd for a third time. Member countries such as Algeria, Kuwait, Libya, Qatar and Iraq (no quota) have signaled in recent weeks that the current quota level is appropriate.
While the OPEC prefers ‘wait-and-see’ how the oil market develops, we believe it has to do more to remove the large stock in the market. According to the US Energy Department, inventories in OECD countries represented around 62 days worth of consumption in June, compared with OPEC’s target of 52-54 days.
The CFTC has adopted tighter regulations to curb excessive speculations, especially on energy and agricultural prices. Several commodity futures were affected. 2 Deutsche Bank PowerShares commodity funds lost the exemption from US position limits in wheat and corn. United States Natural Gas Fund LP suspended a new offering of 1B shares while Barclays Bank suspended selling new shares of its iPath natural gas ETNs. Tightening in position limits should cap oil price advances as investors’ interest in gaining financial exposure in commodities will be reduced.
Natural gas price rebounded strongly after reaching a 7-year low at 2.41 Friday. The October contract settled +8.8% higher at 2.73 but still tumbled -9.9% over the week.
Gas storage added +65 bcf to 3323 bcf in the week ended August 28, making it the highest level since the gauge began in 1993. Demand remains weak while LNG projects in Qatar, Yemen and Indonesia will increase imports to the US.
Gas rigs increased for the 7th consecutive week to 701. Together with oil rigs, total rig counts reached the highest level in 5 months.
Despite strong rebound on Friday, we do not believe the downtrend has ended yet. In fact, weak global demand, rising LNG imports and domestic production will continued to weigh on gas price.
Gold price retreated to as low as 987 after release of US employment report as stock markets and USD strengthened. We felt surprised about the price movement as unemployment rate indeed surged to 9.7%, the highest in 26 years. Investors probably focused on the lower-than-expected decline in non-farm payrolls (-216K vs consensus of -225K) and signs of better employment conditions in the financial sector. The yellow metal quickly pared losses and rebounded to as high as 998.4 before finishing the week at 996.7.
The Nymex gold contract surged +4% over the week and attempted to test 1000 level over the last 2 days. We find the strong performance impressive especially when USD remained largely range-bounded. Decline in US Treasury bond yield probably also drove investors to gold. Silver also gained strongly as driven by gold. The white metal jumped +10% over the week.
Although strength in the past few days has put price into overbought territory and we will not surprise to see profit-taking early next week. However, we believe upside momentum remains. As to whether gold can make new high above 1033.9 depends on whether it can break above February’s high of 1007.7.
CFTC’s restriction on position limits may offer further opportunities on metals as legislations to curb speculations has been focused on energy and agricultural markets for the time being. Furthermore, CFTC’s regulations may reduce financial exposures on commodities. On the other hand, it may drive those who are interested in commodity investments to exposure to physical markets. In this case, metals such as gold and silver are welcomed by investors as they are non-perishable.
Platinum rebounded Wednesday after price dropped to 1-month low at1205.3.PGM prices were affected by supply concerns in South Africa and demand worries as US’ cash for clunker programs ends. Platinum gained +1% while palladium rose +1.9% over the week.
Base metals weakened earlier last week as stock markets declined. However, with encouraging US and China PMI data, most rebounded with exceptions of nickel and aluminum. The best performer of the week was lead with surged +9.4% to settle at 2305 amid shutdown of smelters in China. News said that the government has also shut annual production of around 400K metric tons in Hunan, Shaanxi and Henan provinces while a further closure of 500K metric tons will follow. Despite this, we continue to believe it will not transform to real supply shortage as there’s abundant environmentally friendly plants in China as substitutes.
Copper price plummeted to as low as 6030 after making a almost 1-year high at 6540 on August 28. Although the base metal later rebounded in tandem with rebound in stock markets and strong economic data, it ended the week losing -3.1%. In August, copper inventories have risen almost +70% mom to 86625 metric tons in Shanghai Futures Exchange in August. The increase seems reasonable as China has imported the metal aggressively in the first half of the year. We believe China will have around 2M metric tons of copper surplus this year given the pace of imports.