The themes directing commodity prices remained to be USD, macro economic outlook and equity markets.
The dollar index sank deeper earlier in the week as market sentiment continued to improve. Moreover, as US LIBOR has traded in a discount to Japan LIBOR, there’s speculations that USD will replace Japanese yen as the currency for carry trades. However, the dollar index rebounded after falling to 76.05 after the Fed announced to keep the policy rate unchanged at 0-0.25% and slow down the pace of buying agency debts and MBS without changing the size. The dollar recovered further after major central banks decided to limit their liquidity provisions to the financial systems as economy recovers. This implies supply of USD will be reduced.
Macroeconomic data were mixed. New Zealand’s economy unexpectedly exited from recession in 2Q09 as the GDP grew -0.2% qoq during the quarter after contracting -0.8% in 1Q09. In the UK, BOE’s minutes for September meeting was a non-event as there was unanimous vote for keeping the policy rate unchanged at 0.5% and maintaining the asset purchase program at 175B pounds. There were also no comments about reducing deposit rates on bank reserves. However, Governor Mervyn King’s comment later in the week that weakness in pound is good for UK’s economy and news that the central bank will hold a ‘crisis meeting’ next week to discuss about cutting deposit triggered pound’s weakness.
Stock markets trended lower last week with Dow Jones Industrial Average losing -1.6% while S&P 500 Index sliding -2.2%. Reuters/Jefferies CRB Index plunged -3.7% to 250.5.
Crude Oil
WTI crude oil price was weak most of the day on Friday and was dragged to as low at 65.05 before strong US existing home sales lifted price. The benchmark contract settled at 66.02, paring losses in previous 2 days. On weekly basis, crude oil price slid -8.4% and fell on 3 out of the past 5 trading days.
In the coming week, we believe there’s chance for oil to weaken further. There is possibility for price break the lower level of the recent trading range of 65-75 toward 60. October is normally a shoulder season for energy consumption. However, price will be well-support as it approaches 60.
The selloff last week was triggered by huge build in US crude inventory which increased +2.86 mmb to 335.6 mmb while the market had anticipated a draw of -14.5 mmb. The unexpected inventory build was driven by a +10% increase in oil imports and decline in oil consumption. Decline in oil demand will continue and probably worsen in coming weeks. Mid-September to early October is the transitional period between the end of the driving season and the beginning of winter heating season. During this period, rise in inventory and decline in demand are ‘normal’. However, the current situation has been exacerbated by the extremely weak first half which has driven inventory to very high and demand to very low levels.
Refiners are normally busy with gasoline production before and during the peak driving seasons, and they should be switching to heating oil production at the end of the driving season. However, the switching process will be delayed this year as distillate inventory is abundant and refining margin is low. Decline in refinery runs will cause crude to build up further.
Geopolitical tension arose as Iran has been building a second plant for enriching uranium. In a letter sent to the United Nation’s International Atomic Energy Agency (IAEA) on September 21, Iran stated that ‘a new pilot fuel enrichment plant is under construction’ and more information about the plant will be ‘provided at an appropriate and due time’. US President Obama, President Sarkozy of France and Prime Minister Gordon Brown of Britain said that Iran’s actions are ‘threatening the stability and security’ of the world.
It’s very likely the UN will sanction Iran in coming months, One possibility is restriction on gasoline sales to the nation while Iran may halt its oil exports in return. Although this may trigger worries about gas supply shortage, the actual impact in the near-term should not be significant especially when there’s over 5M bpd of spare capacity.
Natural Gas
Natural gas price rose in the past 4 days and finished the week +5.5% higher at 3.985. Having surged for 3 consecutive weeks, gas price should have been bottomed at 2.5 in early September, at least in the medium term.
Gas storage increased +67 bcf to 3525 bcf last week. The build was largely inline with market expectation, In recent weeks, increase in gas storage has been matched or slightly lower than consensus forecast. There have been 2 different views on the situation. One group of analysts believed the moderated rise in gas inventory has been driven by shutdowns of production plants while the other believes this was due to improvement in gas demand.
Despite slowdown in inventory build, gas will likely reach maximum capacity next week. The highest gas storage was 3545 bcf recorded in November 2007. Should there be an injection of more than 20 bcf in the coming week, gas storage will set a new record high and this is almost a certain thing! Therefore, we believe recent strength in price is premature and a pullback will be seen in the coming week.
Precious Metals
Gold price plummeted to 985.5 before recovering amid renewed weakness in USD. The yellow metal ended the day with -0.7% loss at 991.6. The benchmark contract for gold fell -1.9% during the week, the first weekly decline since early August. Others in the precious metal complex also plunged with silver losing -6% and platinum dropping -3.7%.
Interestingly investors reacted negatively to the news that the Bundesbank, Germany’s central bank, decided to limit its gold sales over the next 12 months to 6.5 metric tons. Sales will be made directly to the German Finance Ministry and part of the gold sold will be used for gold coin production. Moreover, the central bank said that it will refrain from gold sales in the first year of a new CBGA. We believe the selloff was triggered by the words ‘gold sales’. In fact, there has not been any change in the central bank’s long-term policy.
Although ETF investment remained robust, gold holdings in SPDR, the largest gold ETF, slid to 3.518M oz on September 24 after surging to 3.542M oz, the highest level since July 13, earlier in the week. Net speculative long positions for Comex gold futures edged slightly higher to 236.7K contracts in the week ended September 22. Although net long position continued to increase, the pace has slowed down after rising for 5 weeks. We do not feel surprised if there’s a contraction in the coming week. If fact, we have been saying that gold, as well as others in the precious metal complex, is vulnerable to correction given by huge net long positions.
Base Metals
Base metal prices trended generally lower last week as worries about rising inventory and declining China consumption continued to linger in the market. In fact, the rising inventory has been caused by reducing China imports. In coming months, prices will continue struggling until we see a pickup in demand.
LME copper for 3 months’ delivery ended the week -3% lower. In the beginning of the week, price rebounded as support was seen above 6000. However, rebound in USD and weakness in stock markets amplified investors’ concerns about demand and sold down copper to below 6000 Thursday. Price sank to as low as 5990 before recovery.
Source: Oil n Gold