Alan's Finance Blog

Dow Jones Commodity Index Fund Trading Opportunity

Dow Jones Commodity Index Fund – This index tracks the entire commodity market as a whole. Over the past two years we have seen commodities drop in value substantially. The good news is that we could be seeing prices rise going forward from here.

2009 has been a fantastic year for trading commodities with the market bottoming and starting to move higher. This commodity index clearly shows a Cup & Handle pattern and is looking ready to breakout in the coming weeks. The C & H pattern is the best chart formation we could get. Breakouts from these patterns generally provide a rally which can last months at a time.

Let’s take a look at what kind of opportunity looks to be just around the corner.

Dow Jones Commodity Index Chart – Weekly

Commodities appear to have bottomed and are getting squeezed into the apex of the bullish wedge. This index could easily rally to the 180 level which is about 35-40% Gain.

DJP iPath Commodity Index Fund – Weekly

After reviewing several different commodity index funds I like the characteristics for DJP the most. There is enough volume traded which makes for a smooth trading fund on an intraday basis when looking at the 10 minute chart. Several other funds were choppy and thinly traded.

This is Exciting – Everyone knows how most commodity funds vary from the underlying commodity price, well this fund trades identical to the index. What does this mean? It means we can trade the DJP commodity index fund for short term and long term positions because there isn’t any price decay over time.

Performance Chart of Commodity Index & Fund

This chart goes back almost 2 years. As you can see the % change for the index and the fund are virtually identical. We do not need to worry about Contango with this fund.

Major Commodities Breaking Out or Bottoming

Gold, Crude Oil and Natural Gas are highly traded commodities and will play a large role in the direction of the commodity index.

Gold is breaking out to a new high – Bullish

Crude Oil is consolidating in a bullish wedge – Bullish

Natural Gas is trying to bottom and should move higher into the winter – Bullish

Dow Jones Commodity Index Trading Conclusion:

Money has been moving into the commodity sector since March of this year. As a technical trader this opportunity jumps out at me. I wanted to share it with fellow traders because this could be once of the easiest trades of the year if the index breaks out in the coming weeks.

Commodities Edge Higher on a Quiet Day

Crude oil rises to 72.15 in Asia Monday. However, trading volume is thin as Japan, US and Canada markets are closed on holidays today. Last Friday, Dow Jones Industrial Average climbed +4% to 9684.94 and S&P 500 rose +4.5% to 1071.49. Rallies in stock indices to 1-year high spurs interest in oil markets as investors anticipate recovery in energy market consumption.

Despite the improved sentiment, crude oil price will continue to gyrate within recent trading of 65-75 until concrete evidence of demand recovery is seen. Over the weekend, Kuwait’s oil minister Sheikh Ahmad al-Abdullah al-Sabah said that ‘oil prices between 60 and 80 are suitable for exporters and importers’. Judging from outcomes from recent OPEC meetings and comments from member countries, OPEC seems to be satisfied with current price level. The likelihood for further output cut is low in coming few months. In fact, rising spare capacity and rise in oil price have triggered some members to produce more than their quotas. The International Energy Agency estimated OPEC’s compliance has fallen to 62% in September, compared with 66% in August and over 80% in the first quarter.

Gold price has little change after plummeting -0.7% last Friday. Although currently recovers to 1051, the yellow metal may still have risk to decline on long liquidation and USD’s technical rebound. However, gold should resume its uptrend after consolidation. Global central banks’ diversification away from the dollar is expected to pressure USD further. At the same time, diversification would increase central bank’s purchase of gold.

Commitments of Traders

• Crude Oil: Net speculative long positions rebounded to 50006 contracts last week as oil price recovered. While staying below the peak of 62216 contracts 2 weeks ago, net longs in crude oil continued to hover around high level in 2009, suggesting traders were not much affected by stricter CFTC regulations
• Natural Gas: Net shorts contracted for the second consecutive week. Gas price has rebounded strongly in recent weeks but we worry that high gas price would delay demand recovery. Record high gas storage should continue pressure on the cash market which in turn forces the futures market to move lower
• Gold: Net speculative long positions reached record high of 239668 contracts. At long positions have become more stretched, we feel it more necessary for gold price to correct
• Silver: Net speculative long positions pulled back after rising for 7 weeks. Recent rally in silver have been simply an amplification of gold’s rise. Similar to gold, silver is prone to a correction before resuming the uptrend
• Platinum: Net long positions recovered to 17955 contracts

Source: Oil n Gold

Weekly Fundamental Outlook for Energies and Metals – Industry Experts Raised Demand Outlook on Oil

After the RBA’s rate hike at the October meeting, biggest topic in the market has been ‘who’s the next central bank in the developed world to tighten monetary policy?’. While analysts have diverse opinions on which of RBNZ, BOE, ECB and BOC will be the next candidate, the majority anticipates the Fed to keep its unprecedentedly low policy rate at 0-0.25% until 2Q10 and BOJ’s 0.1% rate will stay even longer.

Interest rate differential continued to pressure USD. The dollar index plummeted to 14-month low at 75.996 Thursday before rebounding as investors took Fed Chairman Ben Bernanke’s speech as hawkish. The dollar index declined -0.7% on weekly basis. Weakness in USD drove demand for commodities and the Reuters/Jefferies CRB Index surged +3.8% to close at 262.55.

Crude Oil

Crude oil price was under pressure amid USD’s rebound earlier in the day. However, price pared losses after the International Energy Agency (IEA) upgraded the demand outlook for 2010 for a third consecutive month. The benchmark contract eventually settled at 71.77, adding +2.6% on weekly basis.

The US Energy Department (EIA) and the International Energy Agency released monthly reports last week. Both agencies revised upward their outlooks on world oil consumptions amid improvement in macroeconomic outlook.

The US Energy Department forecast crude demand will increase to 84.77M bpd in 2010 after a drop to 83.67M bpd in 2009. The 2010 forecast was +0.18M bpd above the projection made in September. However, the Department did not change the forecast on WTI crude oil price which remains to be 75/bbl by December 2010.

The International Energy Agency anticipated global oil consumption would rise to 86.1M bpd in 2010, +1.7% yoy as driven by +3.6% demand growth in developing countries while ‘demand from the world’s developed economies is expected to remain stagnant in 2010 after falling -4.5% this year’. The estimate was +0.35M bpd higher than the projection made in September. IEA also upgraded its 2009 consumption forecast to 84.6M bpd, -1.9% yoy. In September, the agency anticipated the demand will drop -2.2% on annual basis.

2 weeks ago, a meeting was carried out between permanent members of the UN Security Council and Germany, and Iran regarding Iran’s nuclear program. Unexpectedly, the meeting was ‘peaceful’ and the progress was better than expected. Iran agreed to let the International Atomic Energy Agency (IAEA) visit the Qum site on October 25. Moreover, Iran agreed to send most of the LEU stockpiles to Russia for further enrichment and then to France for medical research purposes. The deed aims at lowering Iran’s LEU level to what is required for making nuclear weapons.

The geopolitical tension between Iran and the world did boost oil buying. However, how serious is its impact on oil supply and price? In our view, the disruption on oil production is not that severe and the therefore, the impact on oil price is not too much.

Take the invasion of Iraq in 2003 as an example. In Iraq, oil production dropped -36% yoy to 1.34M bpd in 2003. However, oil production in the country had been falling -16% yoy to 2.12M bpd in 2002 and -4% yoy 2.52M bpd in 2001 after making a 20-year of 2.61M bpd in 2000. More importantly, crude production rapidly recovered +50% to 2M bpd in 2004.Concerning oil price, WTI crude rose +6% a week after the war began. However, the rally slowed down and eventually reversed to a fall of -12% in less than 2 months’ time.

Natural Gas

Natural gas price dropped -3.9% to settle at 4.77 Friday. Although the benchmark contract gained +1.1% on weekly basis, outlook remains uncertain and gas price should continue to trade with high volatility.
The US Energy Department forecast that total natural gas consumption will drop -2% in 2009 and -0.2% 2010. There compare to the estimates of a decline of -2.4% in 2009 and 0% in 2010. According to the Department, ‘weak economic conditions continue to hamper the industrial sector, where the most recent data show natural gas consumption is down by -12.4% through July compared with the same period last year. With lower consumption in the residential and commercial sectors as well, natural gas use in the electric power sector continues to serve as the only demand outlet for increased natural gas supplies’.

Natural gas has rebounded strongly in recent weeks. However, we believe price should remain at low level for some more time so as to improve the fundamentals.

US gas storage increased +69 bcf to 3658 bcf in the week ended October 2. The level is +15% above 5-year average. Although the number of gas rigs has dropped more than -50% from its peak in September 2008, recent data form Baker Hughes’s data showed building of rigs over the past few weeks. We believe drilling activities pick up because of rise in gas prices.

On the demand side, the EIA stated that ‘electric power sector continues to serve as the only demand outlet for increased natural gas supplies’. However, further increase in gas price suggests that gas will lose its place to coal and the last resort for the abundant gas storage will disappear. Therefore, we’d prefer gas price to fall more in coming month so that the demand/supply outlook can be rebalanced.

Precious Metals

Comex gold halted the 5-day rally by retreating -0.7% Friday. Settling at 1048.6, the December contract surged +4.4% over the week. Last week’s rally was impressive as gold has broke above the peak made in March 2008 after trading below it for one and a half years. The breach was decisive and price closed above it over the past 4 days.

The retreat last Friday was driven by USD’s strength amid speculations that the Fed will increase interest rate sooner than previously anticipated after Chairman Ben Bernanke’s speech. Investors probably seek more evidence about economic recovery after the RBA hiked its policy rate earlier in the week. In fact, Bernanke’s stance has not changed from what he said in WSJ in July. Meanwhile, a pullback or consolidation in gold price is warranted due to long liquidation. However, we remain bullish on gold price in the long term.

Major reasons driving gold’s rally are weak USD, inflation expectations and minimal sales from central banks.

The Fed has reduced the policy rate to 0-0.25% since late 2008, making it one of the countries offering the lowest funding rates. Last month, USD ‘took over’ Japanese yen as the funding currency for carry trades as the LIBOR rate for USD has dropped below than of yen. G-17′s non-intervening approach to USD’s depreciation and RBA’s beginning of the tightening cycle put further pressure on the greenback and the dollar index will likely resume its long-term downtrend soon.

Although global central banks have been emphasizing that inflation outlook is subdued, investors do not seem to hold the same view. US’ University of Michigan survey showed that consumers anticipated inflation will reach +2.2% in a year, significantly above the current level while UK’s inflation attitude survey by the BOE showed that consumers expected inflation to reach +2.4% in a year.

While IMF’s sales of 403 metric tons gold in coming years does remain as an overhang to gold price, we do not believe it will have any material impact to gold price. As we mentioned before, the sales will be carried out in 4-5 years at market price and the IMF will ensure it will not cause fluctuation in the gold market. IMF’s gold sales will be compensated by gold buying in central banks. Given the huge budget deficits in the US, global central banks have been diversifying away from USD. By August 19, gold sales under CBGA II were 149 metric tons, compared with 358.3 metric tons in 2007/08 and 475.8 metric tons in 2006/07.

Among the above drivers, USD’s weakness is the most prominent one is pushing gold high. In the chart below, the regression line for September data has higher slope than the one for June- August data. This suggests the dollar impact on gold has been stronger than before.

Silver amplified gold’s rally and became the best performer in the precious metal complex last week. In fact, silver price rallied +65% since the beginning of 2009, compared with +21% in gold. Certainly, it was to a large extent a catch-up play as silver plunged -26% while gold gained modestly in 2008. Although gold price has broken its 2008-high, silver, after the +9% rally last week, remained -17% below its record level.

Investor Jim Roger said that silver should have better growth prospect than gold in the precious metal complex as industrial demand on these metals will increase as global economy recovers.

At the end of 2008, gold-to-silver price rose above 80 as silver price plummeted. Recently, the ratio has fallen to around 60. We believe the ratio lies at a fair level now. However, as both gold and silver rallies have been driven by robust investment demands, deeper correction will probably be seen in silver than in gold as positioning in the former is more stretched.

Base Metals

The complex rebounded strongly last week as driven by falling USD, strong equity market as well as some industry specific good news. Alcoa, the largest US aluminum producer, surprisingly reported profits of $77M in 3Q09. Although the figure represented a decline of -33% from the same period last year, it exceeded market expectation of a loss. Concerning demand outlook, the company said the end-market has started to stabilize and demand is improving. Potential production disruptions also helped boost metal prices. BHP, the world’s largest miner has been facing potential strike as its Chilean copper mine as workers demanded for a wage raise. Over 20% of copper-mine output will be affected in 3-6 months.

China will release the preliminary trade data for September and we should see further decline in imports. This remains an overhang for base metal prices in the near-term.

Source: Oil n Gold

Commodities Strengthen as USD Slides

Crude oil price hovers around 70 in European morning as weakness in USD boosts demand for commodities.

Stock markets continue to advance after RBA’s rate hike Tuesday as this signaled economic recovery. In Asia, the MSCI Asia Pacific Index gained +1.2% while Japan’s Nikkei 225 Stock Average climbed +0.3% to 9832. In Australia, S&P/ASX 200 Index rose +1.6% to the highest level in a year as the number of employment surprisingly surged 40.6K in September after a decline of 24.6K in the previous month. The market had anticipated another month of drop by -9.7K.

In Europe, equity markets extend strength. UK’s FTSE 100 pares gain and is rising less than +1% after the Bank of England announced to keep the policy rate at 0.5% and the asset purchase program at 175B pounds. Although the decision came as expected, the statement that the scale of the program would ‘be kept under review’ added uncertainty to the outlook.

At the ECB meeting, which was held in Venice, the Governing Council of the ECB decided to keep its main refinancing rate for a 6th consecutive month at 1%, while the interest rates on the marginal lending facility and the deposit facility also stayed at 1.75% and 0.25% respectively. A press conference will be held at 1230 GMT.

While it’s also widely anticipated the policy rate will stay at 1% today and for an extended period of time as general price level remains subdued, recent rally in gold price has triggered attention the inflation outlook.

Gold price strengthens to as high as 1059.6 in European morning. The following chart showing inflation expectation has been rising in the Eurozone. At the same time, correlation between gold price and inflation expectation has increased significantly since April 2009. Will recent rally in gold price, as an implication to higher inflation expectation, trigger a more hawkish stance in ECB in coming meetings? We believe this is probable.

Others in the precious metal complex also rally with silver soaring +1.9% to 17.83, the highest level in 14 months. Platinum also jumps +1.4% to 1346.

RBA’s Tightening Boosts Sentiment. Investors Seek Risks Again

Commodities rally in European morning as RBA’s surprising rate hike suggested global economic recovery is on the way. WTI crude oil price surges to 71.15 while gold price rallies to as high as 1029, only $5 below the 1033.9 high made on March 2008.

At the October meeting, the RBA announced to raise its policy rate by 25 bps to 3.25% as global economy is resuming growth. According to the accompanying statement, ‘the recovery will likely continue during 2010 and forecasts are being revised higher. The expansion is generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis. Prospects for Australia’s Asian trading partners appear to be noticeably better. Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. For Australia’s trading partner group, growth in 2010 is likely to be close to trend’.

Stock markets also strengthen across the board. In Asia, the MSCI Asia Pacific Index gained +1.4% after falling for 3 days. Japan’s Nikkei 225 Stock Average added +0.2% while Hong Kong’s Hang Seng Index rose +1.9%. Rise in Australia’s S&P/500 200 Index shrank as rate hike will increase the borrowing costs of corporations.

In European morning, UK’s FTSE 100 Index and France’s CAC 40 surge +1.5% to 5099 and 3729 respectively while Germany’s DAX Index adds +1.64% to 5599. Good signs from Australia shadowed weak economic data in the region. UK’s industrial production declined -2.5% mom in August after rising +0.5% in the previous month. In Switzerland, CPI stayed flat in September, following modest gain of +0.1% a month ago.

Saudi Arabia’s central bank denied the news that it has been discussing with China and other countries regarding trading oil using a basket of currencies. Governor Muhammad al-Jasser said that the news is ‘absolutely incorrect and there’s ‘absolutely nothing’ regarding the issue was being discussed.

3 straight days of rally has not only sent the Comex gold futures +2.6% higher, but also helped it made a fresh 18-month high today. As commodities have gathered strong trading momentum these 2 days, it’s likely for the yellow metal to break the record high level of 1033.9 soon.

Investment demand in gold stays robust. Bullion holdings in SPDR Gold Trust have risen for 3 consecutive days to 35.3M oz. This represented an increase of +1.9% from a month ago and +47.5% from a year ago.

Commodities Strengthen as USD is Prone to Head Lower

After weak trading earlier in the day, WTI crude oil rebounded strongly after release of better-than-expected US ISM non-manufacturing index. The front-month contract climbed +0.66% to settle at 70.41 with the intra-day high at 71. Advance in stock markets also lifted price.

Gold price rallied to as high as 1018.9 before settling at 1017.8, +1.3%. Others in the precious metal complex also surged with silver rising +1.9% to 16.54 and platinum gaining +1.4% to 1301.8. The dollar’s weakness against major currencies as G-7 leaders seemed to be comfortable with depreciation in USD. Against the euro and Swiss Franc, the dollar plunged -0.8% and -0.9% respectively. Against commodity currencies, the greenback got bigger hit with NZDUSD rising +2.1%.

Today in Asia, momentum in commodities continues to be strong. WTI crude oil extends gains to 70.6 while gold futures also surges above 1020.

ISM non-manufacturing index rose to 50.9 in September, compared with consensus of 50, from 48.4 in the previous month. This is the first reading above 50 since September 2008 and suggested the services sector in the US has been expanding again. Look into details, the new orders component surged to 54.2 from 49.9 while the business activity component rose to 55.1 from 51.3. Surprisingly, the employment component also improved to 44.3 from 43.5.

Stock market advanced. In the US, the Dow Jones Industrial Average added +1.2% to 9599.8 while S&P 500 Index gained +1.5% to 1040. In Europe, UK’s FTSE 100 and Germany’s DAC climbed +0.7-0.8% while France’s CAC 40 closed flat.

The dollar was pressured after Gulf Arab states are planning to switch to a basket of currencies for oil trading. News said that Gulf Arab states are planning along with China, Russia, Japan and France to end USD’s dealing for oil. Instead, the proposed currency basket will include Japanese yen, the euro, RMB, gold, etc. This would certainly be negative news for USD as major resources commodities have been priced in USD for many years. However, we do not think the ‘basket’ will be a ‘non-dollar’ one.

The dollar plunged against major currencies after Japanese Finance Minister said that he told the G-7 policymakers that countries do not need to devalue their currencies against the dollar. This sent USDJPY below 90.

RBA announced to increase the policy rate by 25 bps to 3.25% today. In the accompanying statement, Governor Glenn Stevens said ‘with growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy’. The tightening widens the interest rate spread between Australia and the US and should weaken the dollar further.

Crude Remains Under Pressure as Recovery Worries Linger

Crude oil trades below 70 in Asia Monday as Friday’s employment data fueled concerns on economic recovery. Weakness in stock market despite renewed decline in USD suggests investors are refraining from taking risks for the moment.

The MSCI Asia Pacific Index slides -0.4% today. In Japan, the Nikkei 225 Stock Average loses -0.1% to 9724. In Singapore, the Straits Times plunges -3% to 2583 while South Korea’s KOSPI drops -1.5% to 1620. Asian equities are catching up the decline Friday after US’ unemployment rose to 9.8% in September with the number of non-farm payrolls plummeting -263K units.

Economist Nouriel Roubini said last week that stock and commodity prices may fall in coming months as the pace of economic recovery does not justify strong rallies in recent months. Roubini said ‘markets have gone up too much, too soon, too fast. I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year’.

Gold price edges slightly higher after a strong rebound in NY session Friday. Currently trading at 1005, the yellow metal’s trading momentum has been helped by weakness in USD. The dollar dropped against major currencies after Boston Fed President Eric Rosengren said last week that the Fed funds rate should be kept at record low until economic recovery is proved to be sustainable. Several Fed presidents will be speaking this week with the NY Fed President William Dudley speaking at New York today and Kansas Fed President Thomas Hoeing speaking tomorrow.

The dollar plunges to 1.46 against the euro after rising to 1-month at 1.448 Friday. In contrary to the market’s expectation, leaders at the G-7 meeting did not criticize about dollar’s weakness.

Commitments of Traders

• Crude Oil: Net speculative long positions dropped one-third to 42142 contracts in the week ended September 29. After rising for 3 consecutive weeks, net long positions in crude should have peaked at 62216 contracts.
• Natural Gas: Net shorts dropped another week to 145 951 contracts as natural gas price rose during the week. Record high in gas storage should continue pressure on the cash market which in turn forces the futures market to move lower.
• Gold: Net speculative long positions declined slightly after soaring for the 5th consecutive week.
• Silver: Although net speculative long positions for silver rose 47 410 contract, the pace of increase has moderated as we expect net longs in silver to decline in the coming week
• Platinum: Net long positions dropped after surging to a record level of 18.2K. Decline in US auto sales in September fuel pessimism in the market again

Source: Oil n Gold Report

Weekly Fundamental Outlook for Energies and Metals – Commodities Consolidate as Economic Outlook is Mixed

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

Commodity Prices Retreat As Disappointing Eco Data Sent USD Higher

Although crude oil added +0.3% to settle at 70.82 Thursday, trading momentum was weakened as the US reported a series of disappointing data. Investors worried that economic recovery might not come as expected and thus drove capital away from risky assets.

US initial jobless claims increased to 551K in the week ended September 26 from 534K in the prior week. The market had anticipated a much more modest rise to 535K. After making a peak in March, initial jobless claims have dropped -18% in 26 weeks. However, the decline was rather gradual compared with previous recessions in 1970s and 1980s. The sluggishness in the falls in claims signals recovery in the job market is slow.

ISM manufacturing index slid to 52.6 in September from 52.9 in the previous month. The market forecast an improvement to 54. Although the index suggested manufacturing activities remained in expansion, decline in some components, such as new orders (Sep: 60.8; Aug: 64.9) and productions (Sep: 55.7, Aug: 61.9), indicated the sector remained vulnerable.

Stock market plunged as investors concern about the employment and growth outlook in the economy. The Dow Jones Industrial Average sank -2.1% to 9509 while S&P 500 Index lost -2.6% to 1030. Today in Asia, the MSCI Asia Pacific Index slips -2%. Japan’s Nikkei 225 Stock Average loses -2.7% to 9715 although the nation’s unemployment rate surprisingly fell to 5.5%, compared with consensus of an increase to 5.8%, in August from 5.7% a month ago. Japan’s household spending also unexpectedly gained +2.6% yoy in August after plummeting -2% in July.

The market’s focus is on US’ employment report today. Payrolls should have dropped -187K in September (-216K in August), sending the unemployment rate to 9.8% from 9.7% in August.

Gold price pulled back and closed below 1000 Thursday as USD rallied. Apart from uncertain economic outlook, the dollar advanced +0.65 against the euro because ECB President Trichet said that euro’s recent appreciation has been too much and disorderly movement in the currency market will have adverse impact on economy. The worst performers were commodity currencies in which Australian dollar, New Zealand dollar and Canadian dollar plunged -1.6%, -1.2% and -1.4% respectively.

Recent strength in gold price hurt physical demand. Besides India, Turkey reported that imports were down -86% mom to 1.7 metric tons in September. In the first months, total imports in the country were 32.9 metric tons, compared with 164.6 metric tons in the same period last year.

Commodities Strengthen as IMF Upgrades Credit Market Outlook

Crude oil price rebounds above 67 in European morning as USD retreats. IMF’s improved outlook on global credits, strong China PMI and Japan industrial output data also revive market expectations on economic recovery. In China, oil stocks plunge after the Chinese government reduced the ex-factory fuel prices.

In its semi-annual report, IMF cut its estimates for loan and investment write-downs by -15% to $3.4 trillion, suggesting improvement in global credit market and world economy. As stated in the report, ‘systemic risks have been substantially reduced following unprecedented policy actions and nascent signs of improvement in the real economy’. However, ‘credit channels are still impaired and the economic recovery is likely to be slow’. Banks’ losses on bad assets will probably increase by $470B, $420B and $140B from July 09 through next year in the Eurozone, the US and the UK respectively.

According to a survey done by HSBC, China’s manufacturing PMI slid 0.1 point to 55 in September from 55.1 in August. Despite the fall, a reading above 50 represented expansion and it’s the 6th consecutive month that the country’s manufacturing sector is in expansionary phrase. The official PMI, to be released tomorrow, is expected to have risen to 55 during the month from 54 in August.

In Japan, industrial production index rose +1.8% mom in August following an upwardly revised +2.1% increase in the prior month. On annual basis, the contraction of -18.7% was much lower than -22.7% recorded in July. Looking into the details, the shipment index for capital goods turned positive, gaining +1.9% qoq in July-August from -17% in April-June, for the first time in 2 years. This might be signaling that capex has almost bottomed as the shipment index for capital goods is usually a leading indicator for capex.

The Chinese government announced to reduce ex-factory prices of gasoline and diesel by RMB 190 a metric ton. Sinopec (0386.HK) and Petrochina (0857.HK) fell -1.4% to HK$ 6.59 and -1.6% to HK$ 8.76 respectively, underperforming -0.3% decline of the benchmark Hang Seng Index, as the cuts will hurt profit margins of refiners.

USD retreats against major currencies amid batter economic outlook as investors seek higher risks. Leading gains against the dollar were Australian dollar and New Zealand dollar. In Australia, retail sales rose +0.9% mom in August after falling -0.9% a month ago. The gain was higher than consensus of +0.5%. In New Zealand, NBNZ business confidence improved strongly to 49.1 in September from 34.2 in the prior month. Against the euro, the greenback weakens to 1.466 after rebounding to 1.453 Tuesday. The currency pair will likely record a decline of -4.7% in the third quarter, after gaining more than +5% in the second quarter.

Gold price climbs above 1000 again as the dollar plummets. No matter whether the yellow metal will close above 1000 today, it will likely record the biggest quarterly gain since 1Q2008. High gold price did exert pressure on jewelry demand. Imports by India, the world’s largest buyer, probably dropped for the 5th month in September, according to Bombay Bullion Association Ltd.

Source: Oil n Gold