Commodity prices rose modestly last week amid weakness in USD. Reuters/Jefferies CRB Index added +1.4% while USD Index plunged almost -2% to 76.6, the lowest close in a year. Commodities normally trade in opposite direction with the dollar.
The generation-low interest rate in the US (Fed funds rate: 0-0.25%) has caused massive selloff in USD. Against the euro, the greenback plunged for 4 out of 5 trading days and closed -1.9% lower at 1.457, the lowest level in 9 months, for the week. Against the pound, USD also slid -1.6% to 1.6655, a 1-month low, last week.
There were 3 central bank meetings last week. All of the RBNZ, BOE and BOC left interest rates unchanged at 2.5%, 0.5% and 0.25% respectively during the meetings but policymakers indicated brighter economic outlooks for 2H09 and 2010.
In the coming week, the BOJ and SNB will decide on rates. We believe both banks will leave policy rates unchanged at 0.1% and 0.25% respectively.
Crude Oil
After spiking to 72.9, crude oil tumbled to as low as 68.8. The October contract plunged -3.9% to settle at 69.12 Friday, leaving this week’s gain to +1.2% only. The black gold’s decline Friday was accompanied by the dollar’s weakness and strong US economic data. These were in contrary to the usual inverse relationship between commodities and USD.
Crude oil started the week with strong rally but ended it with a slump. We believe the reversal was not only due to profit-taking but also a delayed reaction to the industry news/data released during the week.
Both the industry-sponsored API and the US Energy Department reported huge draw in crude oil inventory but surprising increase in gasoline and distillate stockpiles. Although decline in crude inventory positive, surges in fuel storage should have more than offset bullishness.
Gasoline stockpile rose +2.1 mmb last week to 207 mmb. This had not only come in contrary to consensus of a draw but also halted the 6 consecutive weekly declines. In fact, we believe further increase in stockpile will follow in coming months due to the normal shoulder season in the 4th quarter. Distillate stockpile gained for the 3rd consecutive week. Since 3Q09, inventory has risen for 8 out of 10 weeks. As winter comes, demand for heating oil should increase but this may not be the case this year. Meteorologists suggested the possibility of El Nino which may bring a warmer-than-expected winter in the Northern Hemisphere this year.
OPEC concluded September’s meeting and announced to keep production quotas unchanged Wednesday. Apparently, the meeting was a non-event as the outcome was widely anticipated. However, comments from member countries, especially Saudi Arabia, suggested OPEC’s goal to tighten stock level has been dropped.
After the meeting, Saudi Arabia’s oil minister Ali al-Naimi commented that ‘we are enjoying a good, fair price’ and ‘Inventories are irrelevant, they can be 70 days… It has no bearing on price’. This was compared with the comment in May that industry-held stockpiles in developed nations needed to be brought down to the equivalent of about 52 to 54 days worth of consumption, from 62 days. Concerning compliance, Ali al-Naimi did not see the need to put pressure on overproducing members as ‘people are complying anyway, 70% compliance is great’.
Obviously, the members were satisfied with the current price level and Saudi Arabia explicitly mentioned that the current 68-73 level is ‘going to be there for a while’. Giving the OPEC’s significance in affect oil price, we do believe that the current price level can hold in the medium term. The members will increase output should oil price increases. When price drops, say below 60, large producers such as Saudi can reduce supplies, thereby limiting the fall. In this way, crude oil price will consolidate for some time, given global economy improves in a gradual but uncertain manner.
Natural Gas
In tandem with weakness in the energy complex, natural gas sank -8.5% Friday, paring +15% gains made the previous day, after jumping to as high as 3.42. Gas price rose +9.2% on weekly basis, the biggest jump since May.
Thursday’s rally was driven by US Energy Department’s report which showed that working gas in storage increased by +69 bcf, lower than consensus of +72 bcf, to 3392 bcf in the week ended September 4.Storage was currently +17.4% above 5-year average, also narrowed from +19% in prior weeks.
A week’s data will definitely not alter the bearish gas outlook. In fact, gas supplies remained +495 bcf higher than last year and +503 bcf higher that 5-year average. It’s very likely that US gas storage will exceed all-time high of 3565 bcf made in October 2007.
According to Baker Hughes, oil rig counts reduced to 699 units as of September 11 from 701 in the previous week. This was the first decline after 7 weeks’ increase. Producers scaled back output as gas price is expected to remain low for the rest of the year.
Precious Metals
Gold closed above 1000 for the first time since February last Friday. The yellow metal rallied to as high as 1013.7 before settling at 1006.4, adding +1% during the week. The inverse correlation between gold and USD has increased to -0.8 in recent weeks after falling to -0.5 in mid-August, suggesting dollar’s weakness has contributed to gold’s rally. Central banks have been looking for diversifications away from the dollar. Russia’s central bank’s deputy Chairman Alexei Ulyukayev said that the nation’s gold and foreign currency reserve, the world’s third largest and at the level of around $400B, currently holds 47% in USD, 40% in euro and 10% in GBP. While the amount will remain largely the same by year-end, the composition can be changed and 2-3 more currencies will be added. With USD is at risk of depreciation and inflation expectations loom should the massive stimulus measures unwind, we believe gold would be an attractive investments for the government.
Profit-taking was seen in silver after the metal briefly touched 17 (highest: 17.02) Friday. The benchmark contract was flat during the day but managed to gain +2.5% over the week.
Platinum jumped +2.5% to close at 1322.5, the highest level in 12 months, Friday. Over the week, the benchmark contract gained +4.4%. The noble metal rose for 7 out of 9 trading days in September as driven by recovery in the auto sector.
While the market worried that auto sector will turn weak again as the cash rebate program ended, data suggested that the car industry is recovering. In fact, auto sector is the one that drives the industrial sector out of recession since 2H09. Car makers have become more confident and have expansion plans in the coming year with focus on emerging markets. For instance, Ford Motor said that it will start production in small car in India in 2010 while Harley-Davidson said it will start sales in India next year. Hyundai Motor said that it will raise the annual production capacity at its China plant to 600K from 500K beginning 2010.
Base Metals
The base metal complex moved in a consolidative mode last week. Although macroeconomic data continued to show improvements and China data remained strong, drops in preliminary trade data further suggested China stockpiling has completed for now.
LME lead surged to 2517 earlier in the week as investors worried that smelter closure in China would affect supplies. However, massive selling pressure followed and the metal dived to 2065, losing -10.4% over the week. Zinc lost -3.1% in the week. Traders who long zinc/lead pair trade as we recommended last week (Sep 4) should book in profits.
China’s imports of metal declined for the second month in August. Imports for copper dropped to 325K metric tons, down -20% from a month ago. The July imports decreased 15% from the peak level in June. We believe further decrease will be seen, not only for copper but also other industrial metals, in coming months as China’s RMB 4 trillion stimulus plan has come to an end while the country’s current phase of strategic stockpiling has been completed.
