Crude oil price fell to as low as 68.04 Wednesday after the US Energy Department reported huge builds in crude and gasoline inventory. The benchmark contract ended the day at 68.97, down -3.9%. Fuel products also got hammered with RBOB gasoline and heating oil losing -4.3% and -2.9% respectively. Natural gas price surged for a second day by +6.9% to 3.86 amid speculations that maintenance in nuclear plant may spur gas demand.
The EIA reported +2.86 mmb increase in crude inventory which Cushing stocks also gained +0.48 mmb. The rise was driven by large stock build in Gulf Coast while modest increases were also seen in the East Coast and Mid West. As anticipated, refinery runs declined sharply, down -1.4% to 85.6%, as refiners find little incentive in production. Crude imports also rose +0.9 mmb to 9.79 mmb while domestic production remained unchanged.
Another disappointment came from gasoline. Inventory surged +5.41 mmb as demand dropped -2.3% to 8.79M bpd, likely due to the end of driving season. Refinery runs have to decline substantially so as to bring inventory to a more reasonable level. As usual, distillate inventory rose, by +2.96 mmb in the reporting week, as demand remained weak.
Natural gas rallied Wednesday despite the broad-based decline in the energy complex. According to the Nuclear Regulatory Commission, 104 nuclear plants in the US will be shut down for maintenance. This was treated as positive news for gas as it’s believed that this will lend support to gas demand. Moreover, Southern Company, the largest US electricity producer in the US, said that it would increase the use of natural gas for power generation by 24% this year as gas price has dropped to favorable level. The US Energy Department will probably show a +66 bcf increase in gas storage to 3527 bcf.
Outcomes of the FOMC meeting were consistent with market expectation. The Fed left its policy rate unchanged at 0-0.25% and slowed down the pace of agency debt and MBS purchase to 1Q2010 from December 2009. Concerning economic outlook, policymakers acknowledged pickups in economic activities and improvements in financial conditions while stressing that consumer spending remained constrained by employment conditions, income growth, housing prices and credit conditions. The Fed remained dovish on the general price level and stated that ‘substantial resource slack likely to continue to dampen cost pressures’.
The dollar’s movement was mixed after Fed’s statement. USD immediately dived to fresh new 1-year low against the euro as stock market rallied after the release. However, buying interests were then seen and the greenback eventually rose +0.4% against the euro, +0.1% against the pound and +0.5% against Australian dollar and Canadian dollar.
Gold plunged to as low as 1007.2 in US morning yesterday as driven by selloff in crude oil price. Price later managed to recover and eventually settle at 1014.4, down -0.1%. We believe the Fed’s statement was neutral to gold. On one hand, slowdown in Fed’s purchase of agency debt and MBS, as well as the Fed’s assurance to monitor the size and composition of its balance sheet and to make adjustments to its credit and liquidity programs as warranted spurred market sentiment and increased investors’ risk appetite. This helped weaken USD and hence support the yellow metal. On the other hand, the Fed’ dovish statement on inflation: ‘with substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time’ should have posed downside risks no gold price.