Most of the commodities gyrated within their recent trading range last week as the broad market outlook remained mixed.
After a sharp fall to the lower end of the range in the previous week, WTI crude oil price rebounded although there was not much good news from the energy market. Although investors found better weekly fuel consumption as an excuse to boost price, it faltered below 71.5 amid weaker-than-expected job data.
Gold price continued to be directed by USD’s movement which reluctantly trended lower. Although we remain bearish on the dollar’s long term outlook, global central bankers’ unwillingness on dollar’s depreciation should prevent a sharp decline in USD in the near-term.
Crude Oil
Crude oil price plunged to as low as 68.32 Friday as the US Labor Department reported disappointing employment data for September. Investors worried the pace of economic recovery will be delayed and thus took profits from long positions in oil. Although buying interest emerged afterward, WTI crude oil settled -1.2% at 69.95 during the day. On weekly basis, the benchmark contract gained +6%.
After plummeting to the lower end of recent trading range of 65-75, oil price recovered in the middle of the week although the US Energy Department reported larger-than-expected crude builds in the week ended September 25. Investors used the surprising draw in gasoline stockpile, lower-than-expected rise in distillate stockpiles and rise in fuel demand as reasons to bid up prices.
However, we retain out views that crude oil price will continue move range-bounded in coming weeks and occasional rise in demand does not alter the fact that fuel consumptions remain in depressed levels.
Gasoline demand rose to 9.126M bpd last week, representing increases of +3.8% on weekly basis and +4.5% on annual basis. However, Exxon’s CEO said that gasoline demand has already peaked in 2007 and will decline into the futures. In the US, oil product demand was 20M bpd in 2007 and should fall to about 17M bpd by 2020.
Distillate demand climbed to 3.409M bpd after slipping for 3 consecutive weeks. However, current consumption level remained -12.3% below the same period in 2008. 4 week average of 3.387M bpd last week was still down -11.1% from a year ago. The incentive for refiners to switch production from gasoline to distillate is low as heating oil inventory stayed at sky-high level and refinery margins were low.
On the supply side, OPEC members should adhere more strictly to quotas although they seemed to be content with current oil price. According to a survey by Bloomberg, OPEC, the organization controlling 40% of the world’s oil exports, produced 28.395M bpd in September, representing a -0.05M bpd drop from August. The 11 member countries bearing quotas produced 26.045M bpd in total during the month, representing a -0.01M bpd decline from August. However, the output was still +1.2M bpd about the assigned target.
Rex Tillerson, Exxon’s CEO, commented that the OPEC should be more disciplined in their productions. He said that the cartel had been ‘extraordinarily good’ at sticking to the quotas and the compliance level had reached ‘82% which is very good for OPEC’. However, ‘the compliance has reduced to 65% now. When the price of oil got back above 70, some people cannot help themselves’.
For non-OPEC countries, Russia’s total production increased +1.7% yoy to 10.01M bpd in September. This has brought the nation’s production to a post-Soviet high and at +25% above Saudi Arabia’s production.
Although the IMF upgraded their economic forecasts, hard data suggested that recovery came in weaker than expected. Non-farm payrolls in the US declined -263K in September, compared with consensus of -187K, following a -201K decline in the previous month. Unemployment rate rose to 9.8% as expected. The government also revised downward their preliminary estimate of benchmark payrolls by -0.6% (70K per month) in the 12 months through March.
Natural Gas
Nymex gas for November delivery rebounded +5.65 to settle at 4.72 after plunging 7.7% Thursday amid record high storage in the US. Downward pressure at cash market and stock market weighed on front-month contracts.
The Energy Department reported that gas stockpile rose +64 bcf to 3589 in the week ended September 25. According to the government, at current price level, ‘working gas in storage set a new record high for natural gas inventories. Current inventories exceed the previous 15-year-high reported on the Weekly Natural Gas Storage Report (WNGSR) of 3545 bcf, and the all-time high of 3565 bcf reported in the October 2007 Natural Gas Monthly. New record levels were established in the West and Producing regions, exceeding the previous records of 482 bcf and 1126 bcf in the WNGSR, respectively. Meanwhile, the East region is only 86 bcf below its previous 15-year high level of 2041 bcf established on November 14 2008’.
We are bearish on gas price in the near-term as rising gas storage will drag down prices in the cash markets which in turns pressure on futures prices.
Precious Metals
The complex continued to trade on currency factors, with the more volatile metals (silver, platinum and palladium) being more affected by strength in the dollar.
On Friday, gold price sank to as low as 987 as the dollar strengthened to 3-week high against the euro and crude oil and base metal prices got hit. The benchmark contract managed to rebound and close above 1000. On weekly basis, the yellow metal added +1.3% following a -1.9% decline in the previous week.
Next week, gold price will probably remain bounded below the record high level of 1033.9. In fact, we expect the yellow metal to continue to struggling around the 1000 level in the near-term. While we will have a light calendar in the US next week, meetings in RBA, ECB and BOE will have strong impact on currency movement.
In the long-term, we stay bullish on gold price as we are bearish on USD given the huge deficit and monetary easing policy in the country. According to IMF, USD’s share in global currency reserves fell to 62.8% in 2Q09 from 65% in the previous quarter. Euro’s share, on the other hand, rose to 27.5% from 25.9%. This is evidence showing USD’s status as the dominant reserve currency is threatened. Gold will be a beneficiary should central bankers continue to diversify away from the dollar. In fact, decline in European central banks’ gold sales and increase in emerging market’s reserve diversification suggest that central banks will switch from net gold seller to buying in coming years.
Net speculative long position in Comex gold future declined from the peak level to 454.6K contracts last week which that for silver continued to edge higher, despite at a much slower pace. Silver price added +1.1% to 16.23 last week, underperforming gold.
Base Metals
Most base metals headed lower in the past week amid demand concerns. While doubts over a potential recovery in OECD demand persist, a seemingly pause in Chinese stockpiling was the major cause of surge in inventory. More importantly, national day holidays in China will last until October 8 and investors prefer to stay on the sideline during the period.
Huge build in inventory level has made copper the most worrisome in the complex. Copper stockpiles in LME warehouses rose for the 12th consecutive week and have expanded +34% since the week ended July 10. This probably explained why the LME copper for 3 months’ delivery has declined for 5 straight weeks after making a 2009-peak at 6535 on September 8.
In the near-term, metal prices will remain under pressure as investors need to see solid evidence of demand recovery. Moreover, weak Chinese imports will continue to weigh on prices.
Source: Oil n Gold