WTI crude oil plummeted after a 2-day rally as petroleum product inventories increased more than expected. The benchmark contract slid -1.8% to close at 69.57. Others in the energy complex also dropped with heating losing -1.7% and RBOB gasoline falling -2.8%.
Crude inventory drew -0.98 mmb with declines seen mainly from the East Coast, Midwest and the Gulf Coast. Cushing stocks also fell -1.4 mmb during the week. Refinery runs were flat from the previous week and we expected to see reduction in coming weeks as weak demand and weak margins should discourage refiners.
Doubling the builds anticipated by analysts, gasoline inventory rose +2.94 mmb although demand rose to 9.27M bpd. Imports rebounded back over 1M bpd. Distillate stockpile also gained +0.68 mmb, compared with market expectation of a draw. Demand increased to 3.53M bpd during the week.
Despite the macroeconomic recovery, the underlying fundamentals in energy market remain weak. Total oil demand will contract on annual basis. On the supply side, non-OPEC countries such as Russia are producing excessive while compliance from OPEC is slipping.
Today in Asia, energy prices rebound as the dollar weakens. Crude oil recovers to 70.1 but we see limited upside as price should falter below 75.
Although Comex gold pulled back from intra-day high of 1049.7, price rallied for a 4th straight day and settled +0.5% higher at 1044.4. It’s impressive that gold remained strong despite dollar’s rebound yesterday. However, trading volume was rather thin and investors should beware of a retreat.
Today in Asia, the yellow metal extends gains and surges to 1051.8, another record high as the dollar resumes decline. Over the past 5 days, the yellow metal has risen +5%. Record high gold price should continue to weigh on physical demand. At the same time, rise in gold price should induce sales of scrap which in turns gold supplies. We worry that higher supply and lower physical demand would trigger price correction. That said, any correction should be short-lived and investors can consider accumulating the yellow metal on pullbacks.
On the macro front, BOE and ECB meetings are the focuses. The BOE meeting will likely be a quiet one as policymakers should maintain the policy rate at 0.5% and the asset buying program at 175B pounds. Since the meeting in September, economic data released signaled the UK’s economic condition has improved and the downturn should have ended in the third quarter. However, these improvements were not sufficient to trigger a BOE tightening.
The ECB should also keep its main refinancing rate at 1%. We expect the ECB President Trichet to comment on the euro’s strength.