Broad-based decline was seen in commodity prices amid recovery in USD. WTI crude oil price dropped -3.2% to settle at 67.71 while Brent crude oil fell -3.7% to 68.69. Product prices plunged even harder on demand concerns. Both RBOB gasoline and heating oil finished the day at 1.75 with corresponding losses at -4.4% and -4.2%.
Oil demand in China has been closely watched as the country is the world’s second largest oil consumer and the leading growth driver. In August, fuel sales rose +3.2% yoy and +8.1% mom to 18.78M metric tons. Specifically, gasoline sale gained +7.4% mom to 5.89M metric tons while diesel sales climbed +8.6% mom to 11.94 metric tons.
Despite the rise, comments from Sinopec, the biggest refiner in Asia, put pressure on price. Sinopec said that diesel demand in China continued to lag economic recovery. ‘Until now, diesel demand has not recovered effectively, the turnover of refined oil products was still lower than a year earlier, and structural problems were prominent, adding difficulty to maintaining overall balance in supply and demand’.
The benchmark contract for gold sank to as low as 996.3 before rebounding to 1004.9, -0.5%. Others in the precious metal complex also declined with silver dropping -1.1% to 1.688 and platinum losing -1.2% to 1322.2. Obviously, precious metals were pressured by strength in USD. Anotehr reason for the correction was long liquidations of long positions which should probably take some more time to finish, given the record level reported by CFTC.
USD rebounded to 1.46 against the euro after plunging to 1-year low last week. However, we believe the recovery is short-lived as the general theme is chronic weakness in USD. In the medium- to long- term, the dollar should weaken against major currencies amid interestrate differential, lure for risky assets and reserve diversification away from USD.
As we mentioned over the past few weeks, gold’s outlook will depend highly on the robustness in investment demand (apart from decline in USD). This view was supported by GFMS’ report about gold’s demand/supply balance. In the past, gold’s rally was spurred by rise in investment demand while jewelry demand provided a floor to price and mind supply was normally stable.
However, the situation has changed this year. According to the report, mind supply increased +7% yoy in 1H09 and is anticipated to increase by +1% yoy in 2H09. At the same time, scrap supply should also increase as spurrd by high gold price. Jewelry demand, which was very weak in the first half of the year, will improve modestly in the second half but the pace will be slow With this setting, the critical point is on investment demand
Source: Oil n Gold Report