The commodity sector got hammered last week as investors worried that overheating in China and US’ bank proposal to curb risk-taking would reduce demand for higher-yield assets. The Reuters/Jefferies CRB Index dropped -2.1% to 275.56, the lowest level since December 22.
WTI crude oil slid -2% to close at 74.54 Friday in reaction to US’ plan to limit trading banks. Energy demand in the US and China is also at risk of slowing down. The front-month contract plunged for more than -10% over the past 2 weeks.
The US President Barack Obama proposed restrictions on risk-taking at financial institutions. The plan includes limiting the size of financial institutions and to ban some ‘risky’ activities including proprietary trading and internal hedge funds. The news damped investments for risky assets such as commodities and equities.
Having waited for 5 months, investors received the CFTC’s proposal on positions limits on energy contracts (physically settled and cash-settled futures in light, sweet crude oil, Henry Hub natural gas, and New York Harbor gasoline and No. 2 heating oil) on January 14. The purpose of limiting positions is to curb speculations of large banks and swaps dealers in oil, natural gas, heating oil and gasoline markets.
According to the Commission, the aggregate limits are set by formula based on open interest. The AMC speculative position limit would be 10% of the first 25,000 contracts of open interest and 2.5% of open interest beyond 25,000 contracts. The single-month position limit, in turn, is set at 2/3 of the AMC position limit. The position limits would be calculated off of the prior year’s month-end open interest.
Only very bigger positions holders will be affected by the limits and the CFTC showed that 3 unique owners in crude oil market and 1 in the natural gas market were affected during the period from January 1, 2008 to December 31, 2009. However, more traders in heating oil and gasoline markets were restricted.
Apart from the policy side, fundamentals suggested crude oil price should remain within a range of 70-80 in the near-term. Released Thursday, the US Energy Department reported crude oil inventory drew -0.47 mmb to 330.6 mmb in the week ended January 21. Utilization fell to 78.4% for 81.3% but decline in demand was offset by higher reduction (-4%) in imports. Draw in distillate stockpile more than doubled consensus forecasts as extremely cold weather last week raised heating oil consumption. Demand rose +5.8% to 3.823M bpd while production plummeted -10%. Despite the draw, distillate inventory remained +17% above normal. However, gasoline stockpile rose +3.95 mmb to 227.4 mmb as driven by -1.5% drop in demand to 8.602M bpd.
Last year, rally in crude oil price hinged on robust demand growth in China. Indeed, demand in the country was strong as indicated by oil imports which gorse +1.6M bpd yoy in December. The Chinese government reported economy grew +10.7% yoy in 4Q09, the fastest pace since 2007 in 4Q09. For all of the year, the economy grew +8.7%, exceeding the official target of +8%.
However, the data did not send energy prices higher. Instead, the expansion raised worries about further tightening in the world’s third largest economy. We believe Chinese demand in the near-term may slowdown due to policy tightening. However, in the longer-term, imports will pick up again as underlying fundamentals in Chinese economy stays strong.
After rising on Thursday and Friday, gas price added +2.2% last week. According to the US Energy Department, inventory drew -245 bcf to 2607 bcf in the week ended January 22, sending total gas storage -0.2% below 5-year average. Colder-than-expected weather in the US increased gas consumption. As weather returns to normal in coming weeks, we believe demand will reduce and so will supply. For most of the time In 2010, imports from Canada will weaken while production will be lower than last year as the impact of -60% decline (from peak to trough through September 2008 to July 2009) in rig counts feeds in. However, LNG imports will ramp up rapidly. Over the period of 2010 and 2011, LNG investments such as Yemen, Tangguh and Sakhalin projects will raise total capacity significantly.
Gold price tumbled amid profit-taking and broad-based decline in commodities. The benchmark contract for gold plummeted -3.5% to close at 1090.8 last week. Although the yellow metal has fell -6.2% from recent high at 1163, we still see further downside risk, particularly as February and March are weak months seasonally.
PGMs slumped Friday. Platinum dived to 1521.1, the lowest level in more than 2 weeks, before recovery. The metal lost -3.2% over the week. Palladium ended the week with -1.7% decline. Price slipped to a 1-week low of 425 Friday before buying interest emerged. However, rebounds after the sharp fall indicates underlying demand for PGMS remain strong.
In China, imports for platinum and palladium grew +115.7% yoy and +215% yoy, respectively, in December. China overtook the US as the bigger auto market by sales in 2009. At the same time, it also surpassed Germany as the largest car exporter last year. With global auto market anticipated to recovery rapidly in 2010. We believe import s of PGMs for auto-catalysts will rise further.
ETF investments in PGMs remained firm last week. According to ETF Securities, platinum holdings in European and Australian Trusts pulled back to 433.2K oz (-17%) in the week ended January 2010. Holdings in the new US ETF surged to 149.9K oz during the period, from less than 10K oz in the first trading week. For palladium, holdings in European and Australian Trusts declined -4.7% to 648.2K oz while that in the new US ETF rallied to 209.9K oz. Holdings in the first trading week was also less than 10K oz. We improved fundamental outlook and strong ETF investment should boost PGMs prices this years.
The CFTC will hold further hearings in March to discuss about position limits on metal markets. We do not think this would dampen metal demands. As metals are non-perishable and easier to store, restrictions on financial markets will direct investors to physical market investment.
Speculations on further monetary policy tightening in China weighed on base metals and the complex recorded broad-based decline last week. Copper proved to be the most resilient metal in the complex with only modest drop of -0.5%. China trade data showed that net refined copper import rose +26% mom in December. At the same time, the country’s inventory slid -3.3% to 97308 metric tons from the previous week. These evidenced China’s demand for the metal stays strong.
LME contract (3-month delivery) for lead plunged -8% to close at 2237. Last, we saw rapid rise in lead production in China. Producers stockpiled plenty of lead scrap in 2008 amid weak price and they released the scrap to the market in 2009 as price recovered markedly. This had led to significantly increase in secondary production of lead. We believe the phenomenon will continue in the first half of 2010 but should turn better in the second half. Therefore, we should be prepared for further weakness in lead prices in near- to medium-term.
Source: Oil n Gold