Crude oil price rallied +2.2% to settle at 72.51 Wednesday as oil inventory had a huge draw last week and decline in the dollar boosted demand for commodities. Others in the energy complex also gained with RBOB gasoline rising +3.3% to 1.85 and heating adding +2.6% to 1.83. Natural gas rallied +13.3% to close at 3.76 amid short covering. We believe supply surplus remains a problem for gas and price will continue to trade with high volatility.
As reported by the US Energy Department, crude inventory dropped -4.7 mmb to 332.8 mmb in the week ended September 11. The decline was widespread with the Midwest leading the draw by -3.9 mmb. In Rocky Mountain Coast and the West Coast, the modestly declines were partly offset by builds in the East Coast and the Gulf Coast. Refinery runs declined slightly but remained strong at 86.9% of capacity.
Currently at 15.05M bpd, refinery runs was around 500M bpd higher than that in last August. The phenomenon is ‘abnormal’as August is a peak season. We expect refinery runs will continue to fall in coming weeks.
Gasoline inventory increased +0.55 mmb with demand falling -3% to 9.001M bpd. Distillate inventory rose for another week, by +2.2 mmb as driven by -3.6% drop in demand of 3.355M bpd.
The dollar index extended recent decline and plunged to 76.23. Since the beginning of the month, the gauge has dropped -3%. 3-month LIBOR of USD has dropped to a record low of 0.2918% Wednesday. This was the first time in 16 years that the borrowing cost of USD is lower than that of Japanese yen. As risk appetite increases, investors will be more interested in high-yield assets and they will tend to use the dollar as the borrowing currency (instead of the yen) as it charges the lowest cost.
Gold price remains strong in Asia after jumping +1.4% to settle to 1020.2 yesterday. Silver also stays firm after gaining +2.5% to 17.43. Strength in precious metals has been driven by weakness in dollar and worries about inflation. However, at current price levels, investors should be more cautious for any corrections. Moreover, recent rally in gold and silver has been driven by investment demand and ‘speculation’has be a major ingredient. Should traders close their long positions, the correction can be severe.
Concerning the physical market, high gold price usually dents jewelry demand and encourages merchants to sell their scraps, thus increasing physical supplies. In the past, gold’s rally above 1000 had been dampened because of the ample supply in the physical market. This is also another thing that investors should beware.