Strength in stock markets and decline in USD were the major reasons for the rises in commodities. In the US, Dow Jones Industrial Average climbed +2.2% to settle at 9820 while S&P 500 Index surged +2.6% to 1068.3 as driven by better-than-expected housing market (housing starts), employment situation (jobless claims) and improvements in manufacturing activities (Empire State and Philly Fed Index).
The dollar weakened further with every rebound being treated an opportunity to sell as investors’ risk appetite increases. In the coming week, the FOMC meeting will be market’s focus. While the Fed will likely announce to keep its policy rate at 0-0.25% for an extended period of time, it may talk more about plans for exiting from the current stimulus policies.
Crude Oil
Crude oil price retreated to -0.6% to settle 72.04 Friday, the second consecutive day of fall as USD recovered after substantially weakened against major currencies in the past week. On weekly basis, the October contract reached 73.16 the highest and gained +4%. Recent rally in crude oil has been determined by movements in USD and stock markets, rather than fundamentals on the energy market.
US crude inventory declined -4.73 mmb, compared with consensus of -2.3 mmb, to 332.8 mmb in the week ended September 11. Although the draw was much higher than market anticipation, it was driven by robust refinery runs (Refinery runs declined slightly but remained strong at 86.9% of capacity) and reduction in US imports, rather than improvement in demand. In fact, weak demand has been indicated in higher-than-expected increase in gasoline and distillate stockpiles. Gasoline stockpile rose +0.55 mmb to 207.7 mmb while distillate stockpile gained +2.24 mmb to 167.8 mmb, the highest level since 1983.High refinery utilization but weak consumption contributed to the surge in fuel inventories.
Normally, refiners increase gasoline production ahead of and during driving season and then switch to heating oil production after the peak season. However, as distillate inventory remains at sky-high level, the transition will be delayed this year.
Weakness in distillate demand has been linked to industrial production. Although industrial production has picked up in July and August, it remains in multi-year low level. This is quite similar in the case for distillate.
All of EIA, IEA and OPEC’s September reports generally depicted a more optimistic outlook on global energy demand. However, a closer look at the supply side suggests that output growth will continue to exceed demand growth modestly in 2010. On average, the anticipated increase in demand was +0.91M bpd in 2010 from 2009 while total growth in non-OPEC supply and OPEC NGLs will be around +1.07M bpd. This means that there’s no need for any more growth in OPEC’s production in the coming year. This also suggests that although OPEC did not change production at September’s meeting, it may need to announce cuts in coming months.
Natural Gas
Natural gas rose +9.3% to 3.78 Friday although fundamentals in gas market remained weak. The futures climbed +28% this week, the biggest increase since the week ended October 20, 2006. We believe this was mainly technical rebound and gas price should continue to trade with high volatility.
Gas storage rose +66 bcf to 3458 bcf in the week ended September 11. Although the increase was less than market expectation of +80 bcf and the surplus to the 5-year average also have declined to 16% from 17% in the prior week, months of substantial increase in gas have made total inventory almost reach the maximum level in 2008.
Fundamentals remain weak in natural gas. Compared with the same period in previous years, storage of above 3450 bcf has been rare. There are still more weeks until the end of traditional injection season and almost 2 months away from the first winter draw, it’s hard to tell how the huge inventory will be disposed. In the current situation, we do not see any reason for gas price to strengthen further.
According to Baker Hughes, the number of gas rigs has risen 6 units to 705 units in the week ended September 18. Rebound in gas price probably encouraged production.
Precious Metals
The precious metal complex lost ground as USD rebounded from 1-year low against the euro. The benchmark contracts for gold, silver and platinum dropped -0.3%, -1.25 and -0.2% to 1010.3, 17.07 and 1338.2 respectively Friday. However, on weekly basis, the metals continued rising +0.4%, +2.2% and +1.4% correspondingly.
Gold price managed to close above 1000 for 6 consecutive days. We believe the strength was mainly driven by the sharp fall in dollar. During the period (Sep 11-Sep 18), the greenback has dipped -1% against the euro. In fact, the dollar index has already plunged -2.2%, since the beginning of the month.
In the coming week, we believe the yellow metal will consolidate with a range of 1000-1033.9 mainly due to profit-taking. Net speculative long positions made another record high of 235.6K contracts in the week ended September 15 after rising to 224.7K contracts in the prior week. Long liquidation is imminent in the short-term and this will inescapably drag gold price lower.
Inflation fears remerged as both of US’ CPI and PPI beat market expectation. The worry will linger for some time as global economic outlook improves. This, together with lower interest rates, should lend further support to the yellow metal in the medium- to long-term.
Silver’s outperformance over gold will likely cause a heavier correction in the white metal
Platinum has the best fundamental outlook within the complex. Signs of recovery in auto sector, continued robustness in investment demand as well as increase in jewelry demand in China will like push price higher.
Base Metals
Strong macro-economic environment continued to support base metals although, in the near-term, pullbacks will be seen as driven by stock builds in exchanges and reduction in China imports.
LME copper for 3-month delivery slid -3.3% to close at 6175 Friday. Over the week, the benchmark contract dropped in 3 out of 5 days and ended up at a loss of -1.2%. Copper inventory at LME warehouse has risen +2.9% to 327.7K metric tons last week. Inventory at the Shanghai Futures Exchange (SHFE) also soared +7% over the past week. These triggered concerns about demand as China, the world’s growth driver seemed to have halted stockpiling.