Alan's Finance Blog

Oil Price Pulls Back as EZ Economic Sentiment Weakened

Crude oil pulls back in European session in tandem with drops in stock markets. Slightly worse-than-expected consumer sentiment in the Eurozone drove investors away from higher-yield assets. Currently trading at 77.6, the February contract, to be expired tomorrow, returns to the lowest in 2 weeks after recovering briefly Monday.

ZEW economic sentiment in the Eurozone dropped to 46.4 in January (consensus: 48.2) from 48 in the prior month. The reading for Germany also slid to 47.2 (consensus: 49.8) from 50.4 in December. This 4th consecutive monthly fall was driven by concerns about large deficits in some of the countries (e.g.: Greece) in the 16-nationed region. Moreover, recent economic data in Germany is mixed, signaling the pace of growth may be slowing down.

In the UK, CPI surged +0.6% mom in December, following a +0.3% increase a month ago. The rise doubled market expectation of +0.3% and translated into an annual rate of +2.9%, exceeding the BOE’s target of +2%. According the ONS, the surge in annual rate was driven by some one-off events happened in 2008: -2.5% VAT cut, plunge in oil price and discounts done by shops amidst recession. However, inflation pressure will probably increase further after the VAT returns to normal (17.5%) this year.

Gold price continues consolidating with a narrow range as USD’s movement against major currencies is mixed today. GFMS released it 2009 survey last week and forecast the yellow metal’s price may rise to 1230, as well as may fall to 990, in 1H10. In the presentation, the research agency said that robust investment and concerns of inflation and weakness in USD should support price in coming months. Moreover, low real interest rate environment and bumpy economic recovery should be beneficial for the precious metal. Concerning supply, mine production growth will be ‘marginal’ and does not represent change in trend.

That said, GFMS also downside risks which include potential increase in net official sector sales and growing risk of ‘Vulnerability’ to an eventual investment setback.

Stock markets retreat. In Asia, the MSCI Asian Pacific Index lost -0.6%. Benchmark indices for Japan, Australia, Taiwan, etc also slipped. In Japan, the Nikkei 225 Stock Average dropped -0.85 to 10765 as rise in Japanese yen may hurt exports. Honda Motor slid -2.1% while Panasonic lost -2.6% Consumer financing company Promise plummeted -9.7% as the government refused to relax rules for consumer lenders. In contrast, Hong Kong’s Hang Seng Index gained +1% to 21678 after news said that Shanghai may allow individual investors to invest in abroad.

In Europe, stocks decline as disappointing earnings results by Alstom and Casino Guichard-Perrachon hurt sentiments. Benchmark indices lose almost -1%.

Source: Oil n Gold

Oil Price Rises Above 80 on Better Macro Outlook but Fundamentals will Play a Key Role in 2010

WTI crude oil extends the 8th day of rally above 80 on speculations for growth in energy demand as US weather remains below-normal. The February contract surged to as high as 81.16, the highest level since October 26, in European session. While macro-economic outlook and equity market performance will continue to play a role in driving crude oil price, a stronger emphasis will be placed on fundamentals this year than in 2009.

Crude oil price advanced +78% in 2009. However, US oil inventory reached the highest level in almost 2 decade. Look at timespreads, the steep contangoes also suggest severe oversupply in the market. At the same time, the correlation between oil price and stock market rose to 45% in 2009, almost doubling that in the prior year. These evidenced that the strong performance of crude oil last year was driven by macroeconomic outlook and market anticipation of better fundamentals in the future.

As we enter 2010, investors should focus on demand growth. Again, it’s widely expected that China will remain the locomotive for growth. According to the US Energy Department, crude oil demand should rise +1.1M bpd to 85.219M bpd in 2010. Of the 1.1M bpd increase in demand, 0.405M bpd will come from China while only 0.09M bpd from OECD economies.

In 2009, the inverse correlation between USD and crude was prominent. However, this pattern may fade this year. The impact of the dollar’s movement on crude oil depends on its cause. For instance, if USD rises as the US economy improves rapidly and outpaces other countries. This would benefit commodities.

Gold price rebounds strongly to 1118 in European session. Having traded below 1100 for most of the time in the last 2 weeks, the yellow metal appears ‘cheap’ to buyers. Unlike crude oil, we expect strength in USD will continue to pressure gold. In fact, the pile-up of huge short USD/long gold positions in 2009 remains an overhang on gold’s outlook.

Gold and Oil Fall Sharply as Dubai Debt Fear Drives Investors Out of Risks

Commodities drop sharply around the world as markets sentiments are deeply pressured by risk of contagion effect from Dubai debt payment delay request which could trigger second wave in the credit crisis. Gold extended the decline from record high of 1195 and falls sharply to as low as 1130 level before recovering. Crude oil’s selloff also accelerates after taking out 75.57 support and reaches as low as 72.39 so far. Global stocks are under much pressure with Nikkei closed -3.22% low at 9081. European stocks are also sharply lower with FTSE 100 and DAX dropping more than -1% in initial trading.

Dubai World, the government investor company, sought to delay debt repayment until at least May. The news was a shock to confidence in the region and triggered much doubt in governmental support. More importantly, this will be a troubling development for international banks which are increasing dependent on Middle East markets as source of businesses. It’s believed that UK’s RBS, HSBC, Barclays, Lloyds and Stand Chartered are having large exposures in case of defaults.

Gold’s selloff today is a significant indication of short term profit taking after the multi-month power rally to new record high of 1195. 1200 level should be an important psychological level in near term and some correction should be seen to keep gold below 1200 for a while, with some risks of a break of 1100 level. But 1072 should provide strong support to contain the pull back.

Crude oil’s outlook is noticeably worse and 75.57 level will become a key near term resistance level to limit recovery. The choppy fall from 82.00 level would likely extend further towards 70 in near term at least. Meanwhile, deeper decline towards 60 could be seen if sell off in global stocks persist next week.

Sri Lanka as the Third Central Bank to Buy from IMF This Month, Gold Shines

Comex Gold advanced to as high as 1195 in Asian session after Sri Lanka purchased 10 metric tons of the IMF’s planned gold sales. According to the press release from the central bank of Sri Lanka, it has been acquiring Gold from the international market over the past several months ‘as a part of the diversification of the external assets portfolio’. The central bank believes the long-term stability of Sri Lanka’s external reserves will be strengthened as gold holdings will provide ‘a stable and long-term cushion against the impact of any potential volatility in major international currencies and financial instruments, in international financial markets’.

Sri Lanka was the third central bank in the world, as well as in Asia, to buy gold from the IMF this month. Earlier, the Reserve Bank of India and central bank of Mauritius purchased 200 metric tons and 2 metric tons, respectively, from the world lender.

Sale to Sri Lanka was announced shortly after Financial Chronicle’s report that India may want to buy the remaining of the IMF’s planned gold sales. This reinforced the notion that central bankers are seeking to diversify their reserves and gold is believed to be a good choice.

Apart from Asian economies, emerging markets such as Russia is also accumulating gold. Earlier this week, Bank Rossii, Russia’s central bank, reported that it increased its gold holdings by +2.6% to 19.5 metric tons in October so as to raise precious metals’ percentage in reserves.

According to Chairman Sergei Ignatiev, ‘the central bank has in the course of several years replenished its supply of gold with the goal of diversifying our gold and foreign currency reserves’.

Bank Rossii First Deputy Chairman Alexei Ulyukayev said on November 18 that the central bank is ready to buy all gold (30 metric tons) that Gokhran, the precious metals stockpile in Russia, has planned to sell this year.

Although the benchmark contract retreats to 1184 in European morning, the pullback is driven by USD’s recovery which is expected to be short-lived. In our view, minimal profit-taking despite US holiday indicates strong trading momentum.

Crude oil retreats to 77 in European morning after surging more than +2% yesterday. We believe the rally yesterday was mainly driven by slump in USD and strength in gold. Inventory report could definitely not support such a price hike. Crude inventory surged to 337.8 mmb, the highest in 4 weeks. Demand for oil products, while rising on weekly basis, remained depressed when compared with the same period last year. These spurred worries on the recovery outlook in energy market.

Source: Oil n Gold

Gold to Rally to 1200 as India May Buy More from IMF

Gold extends strength after consolidation after news said that Indian central bank may buy more gold. The December contract for the yellow metal rallies to 1180 and looks to march to 1200.

Indian newspaper the Financial Chronicle said that the Reserve Bank of India might buy the IMF’s remaining amount of gold. According to the newspaper, ‘RBI is an independent body and the government does not interfere in its affairs. It will get the gold if its bid is successful and at the price it has offered’. Although the news was not yet confirmed by India’s central bank governor, Duvvuri Subbarao, it thrilled gold bulls.

In early November, IMF announced the sales of 200 metric tons of gold to the Reserve Bank of India (RBI). The amount represented about 50% of the total sales volume of 403.3 metric tons that was approved by the Executive Board in September. About a week later, the world lender reported that sold another 2 metric tons, out of the rest of its planned gold sales of 403.3 metric tons, to the central bank Mauritius at market price. If the RBI makes the purchase, then India will become the world’s 8th largest holder of bullion in terms of volume, surpassing holdings in the Netherlands and Russia.

Further news pushing gold price higher was news that Vietnam has been granted quotas for the import of 10 metric tons of gold since lifting an import ban this month and 6.8 metric tons had already come in.

Central banks in the world, especially those in Asian regions, have strong demand for gold as they want to diversify their reserves from USD.

Crude oil recovers to 76.4 after sliding to as low as 75.78 in Asian session. Market’s focus is on the inventory report by the US Energy Department (EIA). Consensus forecast crude oil inventory rose +1.5 mmb while gasoline stockpile increased +0.3 mmb in the week ended November 20. For distillate, the stockpiles probably remained unchanged from the previous week.

Released after US market close on Tuesday, the industry-sponsored API reported an increase of +3.35 mmb of crude inventory to 336.4 mmb last week. The report was quite disappointing as the build was much higher than market expectation of addition of +1mmb. According to the report, gasoline inventory rose +1.17 mmb to 212.2 mmb and distillate stockpile drew -2.36 mmb to 166.9 mmb.

While the EIA’s report may echo API’s bearishness in oil market, oil trading should remain thin ahead of Thanksgiving holiday.

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

Industry Estimates Showed Huge Decline in Crude Inventory

Crude oil price climbed higher yesterday after the American Petroleum Institute reported huge decline in crude inventory last week. The benchmark contract added +0.3% to close 79.14. In Asian session today, price continues to edge higher but upside momentum decreases as price moves closer to 80.

According to the industry-sponsored API, crude oil inventory drew -4.37 mmb to 333.1 mmb in the week ended November 13. The decline was significantly more market expectation of a drop of -2.2 mmb because attack of Hurricane Ida during the week caused shutdown of 43% of oil production facilities in the Gulf of Mexico. Gasoline stockpile was down -0.93 mmb, compared with consensus of -0.5 mmb, to 210.5 mmb as imports reduced. The disappointment came again from distillate stockpile which rose -0.51 mmb during the week as imports increased while demand slid.

The US Energy Department will deliver its weekly report in US session today. Crude inventory probably climbed +0.3 mmb. Gasoline and distillate stockpiles are anticipated to have dropped -0.025 mmb and -0.85 mmb, respectively.

Speculations on central bank buying and weakness in USD continue to drive investor crazy for gold. After mild consolidation Tuesday (closed at 1139.4, +0%), the yellow metal extends to a fresh record high at 1144.7 in Asian morning today.

The IMF’s sales of gold to the Reserve Bank of India and the central bank of Mauritius signaled more central banks will step up gold purchases. This phenomenon is positive for gold.

USD recovered modestly against major currencies as stock markets eased after US’ inflation, industrial production and housing data missed expectations. The dollar index gained +0.6% yesterday. The US Labor Department reported that PPI rose +0.3% mom while core PPI contracted -0.6% mom in October. Both readings were weaker than market expectations. Industrial production grew +0.1% mom in October while the market had anticipated a +0.4% increase. Worse still, September’s reading was revised down to +0.6%. NAHB housing market index stayed flat at 17 in November, contrary to consensus of an improvement to 19.

If economic data in the US continue to be disappointing, this should lead to weakness in USD in the long-term. Subdued inflationary pressure will allow the Fed to maintain its accommodative monetary policy for a long time.

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

Crude Breaks Above 80 Again As Investors Speculate Pleasant Surprise from Energy Department

Crude oil rises above 80 (intra-day high: 80.23) in European morning. Investors are awaiting the EIA’s inventory report. As the market anticipates modest build in crude oil inventory, a surprising draw could trigger strong buying which may push price above the said intra-day high. However, we doubt if the rally will be sustainable as the inventory draw was to a large extend driven by hurricane Ida, rather than recovery in demand.

Gold extends rally to 1149.5 in European morning as the dollar resumes weakness. USD plummets -0.07% to 1.497 against the Euro ahead of US housing start and CPI data. Investors stay bearish on USD despite ECB President Trichet’s strong-dollar speech. Trichet said yesterday that a strong dollar is in the world’s best interest. Moreover, he denied the euro will be replacing USD as the dominant reserve currency. ‘The euro wasn’t created to compete with the dollar or to be a substitute to the dollar as a reserve currency…The ECB isn’t campaigning for the international use of the euro’.

US CPI probably rose +0.2% mom for the second consecutive month in October as driven by increase in energy prices. However, core CPI should have slowed to +0.1% mom in October from +0.2% a month ago. The soft reading in core CPI was due to weakness in the ‘rent and owners’ equivalent rent’ component. Housing starts are expected to have increased to 599 K units in October from 590K units a month ago.

The Bank of England minutes for November’s meeting revealed that while all members voted for maintaining the policy rate at 0.5%, there were splits regarding adjustment in the asset buying program. Out of the 9 MPC members, 7 favored extending the program by 25B pound. However, Chief Economist Spencer Dale preferred no change while David Miles favored a 40B-pound expansion. According to the minutes, Dale said that ‘further substantial injections of liquidity might result in unwarranted increases in some asset prices that could prove costly to rectify, complicating the task of meeting the inflation target in future’. Miles suggested a bigger expansion because it could ‘provide greater insurance against the downside risks to growth and inflation arising from constrained credit supply. That would maintain a similar rate of purchases as had been the case in the previous three months, once the intended break in the purchase program at the end of December was taken into account’.

Stocks in Europe advance as driven by rallies in commodity shares. In the UK, the FTSE 100 index climbs +0.4% to 5366. Germany’s DAX and France’s CAC 40 surge +0.7% and 0.6% to 5820 and 3583 respectively. Spurred by strength in oil price, BP and Shell adds +0.7% each. Mining shares, Xstrata and BHP Billiton, soar +3% and +2% respectively.

Earlier in Asian session, stocks plunged as investors concerned about capital-raising and share-issuance activities in banking and property sectors. While the MSCI Asia Pacific Index made little change in the day, Japan’s Nikkei 225 Stock Average slid -0.6% to 9677 after developer Tokyo Tatemono announced a plan to sell 45.6B yen in shares, the stock slumped -17%.

Source: Oil’n'Gold

Crude Oil Daily Technical Outlook

Nymex Crude Oil (CL)

Crude oil’s rally extends further today and the break of 73.16 resistance indicates that fall from 75.0 has completed at 65.05 already. The corrective three wave structure in turn argue that crude oil’s medium term rally is not completed at. Intraday bias is on the upside for retesting 75.0 first. Break will target 38.2% of 147.27 to 33.2 at 76.77 next. on the downside, below 72.18 minor support will turn intraday outlook neutral and bring consolidation first.

In the bigger picture, the break of 73.16 resistance favor the case that rise from 33.2 is still in progress for another high above 75.0. Nevertheless, strong resistance should be seen in 76.77/90.24 fibo resistance zone (38.2% and 50% retracement of 147.27 to 33.2) to conclude the medium term rise finally. On the downside, in case of pull back, break of 65.05 is needed to revive the case that crude oil has topped out. Otherwise, further rise is still in favor.

Nymex Crude Oil Continuous Contract 4 Hours Chart

Nymex Crude Oil Continuous Contract Daily Chart

Crude Oil Daily Technical Outlook

Nymex Crude Oil (CL)

Crude oil edged higher to 72.55 but upside momentum remains unconvincing. Nevertheless, another rise is still mildly in favor with 68.16 support intact. Break of 73.16 will indicate that fall from 75.0 has completed at 65.05 already. The corrective structure will in turn indicate that medium term rally is still in progress for another high above 75.0 before completion. On the downside, below 68.16 will suggest that rebound from 65.05 has completed and will flip intraday bias back to the downside. Break of 65.05 will reaffirm the original bearish view that crude oil has topped out at 75.0 already and will bring fall resumption towards 58.32 key support next.

In the bigger picture, the lack of follow through selling so far dampens the bearish view that crude oil’s medium term rise from 33.2 has completed at 75.0. Nevertheless, risk remains on the downside as long as 73.16 resistance holds. A break below 65.05 support will solidify the case the crude oil has topped out in medium term again. In such case, deeper fall should be seen to test on 58.32 cluster support (38.2% retracement of 33.2 to 75.0 at 59.03) first and break will target a retest of 33.2 low. However, a break of 75.0 will indicate that rise from 33.2 has resumed for 76.77/90.24 fibo resistance zone (38.2% and 50% retracement of 147.27 to 33.2) instead.

Nymex Crude Oil Continuous Contract 4 Hours Chart

Nymex Crude Oil Continuous Contract Daily Chart

Dollar’s Rebound Won’t Sustain as No Rate Hike from Fed Soon

Crude oil trades narrowly in European morning. As USD rebounds after Fed Chairman Ben Bernanke’s speech about policy tightening, commodities pare gains. In the energy complex, WTI crude oil pulls back to 71.3, heating oil to 1.836 and RBOB gasoline to 1.766. In the precious metal complex, Comex gold retreats to 1050 while silver and platinum fall to 17.6 and 1345 respectively.

Investors viewed Bernanke’s speech at a Board of Governors conference yesterday in Washington as a sign of potential tightening. However, there’s nothing new compared with the views he expressed in a WSJ article on July 21: ‘At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner’.

In fact, it’s not likely for the Fed to increase interest rate anytime soon. In an interview, Dallas Fed President Fisher said that ‘we are going to move when we have to move. But it’s not now. Things are fragile but they’re moving in the right direction. If you step back, it is going to take a long time to heal from the kind of severe shock we had, the severe correction we had. There is more confidence but it is not anywhere near robust in the job creating private sector’.

Although the dollar reverses ground after Bernanke’s speech, the rally will not be sustainable. Global fundamentals should continue to weigh on the dollar. Bloating US trade deficit and strength in emerging market currencies such as RMB, should continue to pressure the dollar.

Natural gas rose +69 bcf, compared with consensus of +60 bcf, to 3658 bcf in the week ended October 2. According to the US Energy Department, storage stayed +15% above 5- year average. However, gas price climbed for a second day yesterday, partly driven by broad-based rally in the energy complex and partly amid expectations that demand will increase as we enter the winter heating season.

Among the several factors driving gold’s rally, including dollar’s weakness, limited central bank sales, reserve diversification and inflation expectation, we believe the most prominent one is dollar’s weakness. The chart below shows that gold has broken the 2008 record high on October 6 only in dollar term while price remains well below historic high when denominated in other currencies.

Source: Oil n Gold Report