Alan's Finance Blog

Energies Rallied on USD’s Fall – Pull back in Asia as Inventory Surged

Most commodities rose Tuesday as decline in USD resumed. WTI crude oil jumped +2.6% to 71.65 while Brent crude gained +2.7% to 70.53. Others in the energy complex also advanced with heating oil surging +3.4% to 1.81 and RBOB gasoline adding +1.7% to 1.78. However, profit-taking was then seen Wednesday morning as API reported increase in fuel inventory and Total’s CEO said oil price is too based on supply. The benchmark contract is currently trading at 71.4.

USD plummeted against major currencies as the market anticipates the Fed will leave its policy rate unchanged at 0-0.25%. US LIBOR has been trading below Japan LIBOR since August 24 and the spread has been widening. USD might have been replaced Japanese yen as a currency borrowed for carry trades. This poses more downside risks to the dollar’s outlook should market sentiment improves further.

The best performer was NZDUSD which rallied +1.7%. New Zealand’s GDP grew +0.1% qoq in 2Q09, compared with consensus of a -0.2% contraction, following a upward revision to -0.8% in 1Q09. The unexpected step out from recession surprised the market and sent the Kiwi to 13-month high.

After market close, the industry-sponsored API reported that crude inventory rose +0.28 mmb, compared with consensus of -0.95 mmb, to 337.2 mmb in the week ended September 18 as driven by rise in imports and decline in refinery runs. Gasoline stockpiles also surged +3.82 mmb while analyst forecast it to gain only a modest +0.5 mmb. Surprisingly, distillate stockpiles drew -1.88 mmb as demand improved.

The US Energy Department will probably report crude inventory drew -1.5 mmb while both gasoline and distillate stockpiles gained, -0.2 mmb and +1.2 mmb respectively.

Christophe de Margerie, the CEO of Total SA, oil giant based in France, commented that oil price should fall below $60/bbl is it’s valued based purely on demand and supply. The market is ‘speculating’ that oil supply will be insufficient in 5-6 years’ time but ‘in the short term, it’s true there is oversupply. In the medium to long term, we see oil prices steady to say the least, with a risk to go to higher levels if we can’t meet demand’.

Gold price gained +1.1% to 1015.5 and silver rose +1.4% to 17.12 Tuesday on USD’s weakness. Recent rally for gold has been driven by substantial decline in USD, together with policymakers’ discussions about diversifying central banks’ reserves away from the dollar.

Renewed selling pressure in USD was seen as the market expects the Fed will continue to adopt a highly accommodative monetary policy for an extended period of time despite economic recovery. Moreover, news said that one of the focuses in the G-20 meeting at Pittsburg will be on the large US current account deficit which would trigger worries about stability of USD again.

US Oil Inventory

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

Oil Dropped Below 70 amid Weakness in China’s Diesel Demand

Broad-based decline was seen in commodity prices amid recovery in USD. WTI crude oil price dropped -3.2% to settle at 67.71 while Brent crude oil fell -3.7% to 68.69. Product prices plunged even harder on demand concerns. Both RBOB gasoline and heating oil finished the day at 1.75 with corresponding losses at -4.4% and -4.2%.

Oil demand in China has been closely watched as the country is the world’s second largest oil consumer and the leading growth driver. In August, fuel sales rose +3.2% yoy and +8.1% mom to 18.78M metric tons. Specifically, gasoline sale gained +7.4% mom to 5.89M metric tons while diesel sales climbed +8.6% mom to 11.94 metric tons.

Despite the rise, comments from Sinopec, the biggest refiner in Asia, put pressure on price. Sinopec said that diesel demand in China continued to lag economic recovery. ‘Until now, diesel demand has not recovered effectively, the turnover of refined oil products was still lower than a year earlier, and structural problems were prominent, adding difficulty to maintaining overall balance in supply and demand’.

The benchmark contract for gold sank to as low as 996.3 before rebounding to 1004.9, -0.5%. Others in the precious metal complex also declined with silver dropping -1.1% to 1.688 and platinum losing -1.2% to 1322.2. Obviously, precious metals were pressured by strength in USD. Anotehr reason for the correction was long liquidations of long positions which should probably take some more time to finish, given the record level reported by CFTC.

USD rebounded to 1.46 against the euro after plunging to 1-year low last week. However, we believe the recovery is short-lived as the general theme is chronic weakness in USD. In the medium- to long- term, the dollar should weaken against major currencies amid interestrate differential, lure for risky assets and reserve diversification away from USD.

As we mentioned over the past few weeks, gold’s outlook will depend highly on the robustness in investment demand (apart from decline in USD). This view was supported by GFMS’ report about gold’s demand/supply balance. In the past, gold’s rally was spurred by rise in investment demand while jewelry demand provided a floor to price and mind supply was normally stable.

However, the situation has changed this year. According to the report, mind supply increased +7% yoy in 1H09 and is anticipated to increase by +1% yoy in 2H09. At the same time, scrap supply should also increase as spurrd by high gold price. Jewelry demand, which was very weak in the first half of the year, will improve modestly in the second half but the pace will be slow With this setting, the critical point is on investment demand

Source: Oil n Gold Report

Profit-taking Seen In Crude & Gold as Recent Rallies Looked Excessive

Crude oil price rose to as high as 73.16 Thursday as driven by better-than-expected US housing starts, initial jobless claims and Philly Fed manufacturing data. However, the gauge ended the day -0.1% lower at 72.47 after surveys showing that OPEC exports will increase in coming weeks.

RBOB gasoline climbed +0.2% to 1.85 while heating oil added +0.8% to 1.84. Natural gas erased previous gains and slipped -8% to 3.46 although gas storage increased only ++66 bcf to 3458, compared with consensus of a +80 bcf gain.

US housing starts increased to 9-month high at 598K in August while July’s reading was also revised up to 589K. all of the gains were from multi-family starts as single-family starts unexpectedly reversed the uptrend and fell -3% during the month.

Initial jobless claims dropped to 545K in the week ended September 12 from 550K in the prior week. As the market had anticipated an uptick to 558K, the data did provide pleasant surprise and signal the economy is improving. 4-week average claims also plunged -9K to 563K.

After the Empire State Index, the Philly Fed manufacturing index also beat market expectation by surging to 14.1 in September (consensus:7.8) from 4.2 in August. This suggested manufacturing sector in the region has improved more rapidly than estimated.

After all those positive macro-economic data, traders took profit as the benchmark contract for WTI crude soared towards the upper band of the recent trading range of 65-75. According to Halifax, a tanker-tracker based in England, said that OPEC will increase its sea exports by +0.9% to 22.57M bpd in the 4 weeks ending October 3. The news probably also weighed on USD.

Long liquidation was seen in gold as price plunged -1.75 to close at 1013.5 after surging to new 2009 high at 1025.8. Silver and platinum also dropped -0.9% and -0.6% respectively. The precious metals declined although USD fell to fresh 1-year low against the euro because investors took profits from recent rallies. Over the past 4 weeks, gold price has risen +10%, while silver and platinum has surged +25% and +10% respectively.

From the Commitments of Traders report reported by the CTFC, net speculative long positions in gold, silver and platinum have all reached the highest level in more than a year (new highs for gold and platinum). In the near term, short-selling pressure is likely as traders book profits.

Oil Price Remains Firm As Strong Stock Market Offers Support

Strong trading momentum in crude oil persists and the benchmark contract rises further to 72.7 in European morning. Investors remain thrilled by the huge draw in crude inventory despite weak fuel demand. Advance in equity markets and weakness in USD also support prices.

Stock markets in Europe open higher Thursday. UK’s FTSE 100 Index climbs +1% tpo 5172 although the country’s retail sales stayed flat in August from a month ago. The market had expected a +0.1% gain. On annual basis, the gauge rose +2.1% while July’s sales were revised down to +2.9%. Both of DAX (Germany) and CAC 40 (France) gain +0.6% in morning session.

Stocks in Asia performed very well with the MSCI Asia Pacific Index rising +1.2%, In Japan, the Nikkei 225 Stock Average surged +1.7% to 10444 as the Bank of Japan upgraded its economic outlook on the nation. The BOJ stated that Japan’ economy has shown ‘signs of recovery’, compared with the ‘stopped worsening’ comment made in the previous month. However, the central bank remained concerned about the downside risk to growth and hence maintained the policy rate at 0.1%.

Natural gas pares the 13% gain made yesterday as analysts anticipated gas storage rose +80 bcf to 3472 bcf in the week ended September 11.

Focus of the day will be SNB’s rate decision. It’s true that the unanimous view is that the SNB will keep the 3 month LIBOR target at 0.25%. However, we would like to see if the central bank will reaffirm the measure to prevent Swiss Franc from appreciation. In fact, we believe the SNB will likely reiterate this. Although the economic data have given positive surprises since the June’s meeting, inflation pressure remains subdue in Switzerland’s economy. Headline CPI picked up in August but remained in negative territory while core CPI continued trending further away from SNB’s target of 2%. Therefore, the central bank will likely stick with its accommodative monetary policies as well as continue combating against strength in CHF.

The dollar plunges for the 4th consecutive day against the euro. A report stated that trade surplus in the Eurozone widened to 6.8B euro in July, compared with consensus of 1.2B euro, from 1B euro in the previous month. This further signaled improvement in global economic outlook and increased risk appetite for higher-yield assets.

Gold price reached another 2009-high at 1024.7 earlier today before pulling back slightly to 1018. ETF investments remain in record as indicated by ETF Securities’ report. Bullion holdings in its funds reached a record of 8285M oz as of September 16. This represented increases of +1.6% from a week ago and +13.7% from a month ago. Meanwhile, holdings in SPDR Gold Trust also rose to 34.9M oz as of September 16.

Commodity Prices Strengthen as USD Continues its Slide

Crude oil price rallied +2.2% to settle at 72.51 Wednesday as oil inventory had a huge draw last week and decline in the dollar boosted demand for commodities. Others in the energy complex also gained with RBOB gasoline rising +3.3% to 1.85 and heating adding +2.6% to 1.83. Natural gas rallied +13.3% to close at 3.76 amid short covering. We believe supply surplus remains a problem for gas and price will continue to trade with high volatility.

As reported by the US Energy Department, crude inventory dropped -4.7 mmb to 332.8 mmb in the week ended September 11. The decline was widespread with the Midwest leading the draw by -3.9 mmb. In Rocky Mountain Coast and the West Coast, the modestly declines were partly offset by builds in the East Coast and the Gulf Coast. Refinery runs declined slightly but remained strong at 86.9% of capacity.

Currently at 15.05M bpd, refinery runs was around 500M bpd higher than that in last August. The phenomenon is ‘abnormal’as August is a peak season. We expect refinery runs will continue to fall in coming weeks.
Gasoline inventory increased +0.55 mmb with demand falling -3% to 9.001M bpd. Distillate inventory rose for another week, by +2.2 mmb as driven by -3.6% drop in demand of 3.355M bpd.

The dollar index extended recent decline and plunged to 76.23. Since the beginning of the month, the gauge has dropped -3%. 3-month LIBOR of USD has dropped to a record low of 0.2918% Wednesday. This was the first time in 16 years that the borrowing cost of USD is lower than that of Japanese yen. As risk appetite increases, investors will be more interested in high-yield assets and they will tend to use the dollar as the borrowing currency (instead of the yen) as it charges the lowest cost.

Gold price remains strong in Asia after jumping +1.4% to settle to 1020.2 yesterday. Silver also stays firm after gaining +2.5% to 17.43. Strength in precious metals has been driven by weakness in dollar and worries about inflation. However, at current price levels, investors should be more cautious for any corrections. Moreover, recent rally in gold and silver has been driven by investment demand and ‘speculation’has be a major ingredient. Should traders close their long positions, the correction can be severe.

Concerning the physical market, high gold price usually dents jewelry demand and encourages merchants to sell their scraps, thus increasing physical supplies. In the past, gold’s rally above 1000 had been dampened because of the ample supply in the physical market. This is also another thing that investors should beware.

Gold Price Rockets Amid Higher Inflation Expectations

Gold price extends strength in European morning and rises to as high as 1023.3 amid renewed inflation expectations. Rally in stock markets driven by better-than-expected economic data drag the dollar lower. This also helps the yellow metal.

Apart from strong retail sales in August, the US PPI also beat market expectation by rising +1.7% mom in August after contracting -0.9% a month ago. On annual basis, the reading dropped -4.3%, compared with consensus of -5.4% and -6.8% in July. Core CPI increased +0.2% mom and +2.3% yoy during the month.

Released in the Eurozone, the 16-nation region’s CPI rose +0.3% mom in August after declining -0.7% a month ago. On annual basis the gauge dropped -0.2%. However, excluding food and energy prices, CPI rose +1.3%, compared with market expectation of +1.2%.

Investors await the US’ inflation report to be released at 1230 GMT. Headline CPI probably rose +0.3% in August as driven by +3.5% increase in gasoline price at the pump. On annual basis, the gauge’s decline probably moderated to -1.7% from -2.1% in July. Core CPI should have dropped on both annual and monthly basis as mainly driven by the Government’s ‘cash for clunkers’ program.

Although central bankers in major economies have stated inflationary pressure remained tame, investors concerned that policymakers would not be able to exit swiftly from the massive stimulus measures adopted since late last year when the time comes. If the exit strategies are not carried out in a timely manner, the world economy is at risk of falling into hyperinflation.

In concert with gold’s rally, silver price surges another +2% to 17.35. Gold -to-silver ratio continues to narrow (currently at 58.6), suggesting outperformance of silver relative to gold. Some analysts warned of excessive positioning on the futures markets for gold and silver. In fact, we do not advise developing long positions aggressively for now as both prices have entered overbought territories.

Crude oil price trades narrowly above 70 ahead of inventory report from the US Energy Department. Although consensus forecast another week of crude decline, the surprising increase in crude inventory and higher-than-expected surge in fuel stocks made investors more cautious about the energy market outlook.

Stock markets advanced in both Asia and Europe. In Asian session, the MSCI Asia Pacific Index soared +1.9%, the biggest increase since August 24. In Australia, the S&P/ASX 200 Index rose +2.4% as driven by rallies in Telstra and BHP Billiton. In Japan, the Nikkei 225 Stock Average gained +0.5% to 10271. The Index initially surged +1.7% but gains were erased after some analysts said the new Japanese Government (DPJ)’s policies may delay the nation’s economic recovery.

In Europe, UK’ FTSE 100 Index rose +1.% to 5116 although the ILO unemployment rate rose 7.9% in the 3 months through July, the highest level since 1996, from, 7.8%. Germany’s DAX and France’s CAC 40 also increase +0.9% and +1.3% to 5678 and 3802 respectively. In Germany, the ZEW expectation index increased to 57.7 in September from 56.1 in the prior month, suggesting improved investors’ confidence in the coming 6 months.

Crude Oil Rebounded Amid Strong US Eco Data

Crude oil price rebounded strongly Tuesday as OPEC raised oil demand forecasts for 2009 and 2010, US economic data beat market expectations as well as Fed Chairman Ben Bernanke said that US recession has ‘very likely’ ended. The October contract surged to as high as 71.19 before finishing the day +3% higher at 70.93. Heating oil and ROBO gasoline also rose +2% to 1.7801 and +2.6% to 1.7892 respectively. However, selling pressures were seen after the industry-sponsored API reported inventory gains in all of crude, gasoline and distillate.

OPEC slightly upgraded its forecasts on world oil demand to 84.05M bpd (previous: 83.91 M bpd), -1.8% yoy, in 2009 and 84.56M bpd (previous: 84.41M bpd), +0.6% yoy, in 2010 as driven by improved global economic development. The world GDP growth was also revised up by +0.2% to -1.2% in 2009 and by +0.1% to 2.5% in 2010.

US retail sales rose +2.7% mom, compared with consensus of +1.8%, in August following a -0.2% decline in the prior month. The major contributor of the increase was from autos which rose +10.6% in the month. Excluding autos, the reading increased +1.1%, also better than market expectation of +0.4%, as driven by gasoline sales. What surprised the market the most was the ex auto ex gasoline retail sales also beat estimates and rose +0.6%, signaling improvements in other areas such as clothing, sporting goods and electronic appliances.

Empire States manufacturing index surged to 22-month high at 18.9 in September, higher than market forecast of 14, from 12.08 in July. This suggested manufacturing activities in the New York region is expanding more rapidly than expected. The ‘new orders’ component rose to 19.8 but ‘shipment’, ‘inventories’ and ‘employment’ components slid from the previous month.

At a speech about financial crisis in Washington, the Fed Chairman Ben Bernanke said that ‘even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time’. Concerning employment, the Chairman commented that the employment rate will be slow to come down. Obviously, the Chairman comment was less upbeat than what was portrayed in news headlines but investors’ sentiment was boosted by better data and whenever they heard about words such as ‘recovery’ and ‘recession ends’!

After US market close, API reported disappointing inventory data which showed that crude stockpile rose +0.63 mmb, compared with consensus of a -2.9 mmb decline, to 336.9 mmb In the week ended September 11. Fall in refinery runs and increase in domestic production offset the decline in import. Gasoline stockpile rose +1.35 mmb to 208.8 mmb while distillate stockpile added 5.2 mmb to 170 mmb. Both gains were higher than market expectations, suggesting sluggish demand in the market.

The market awaits the US Energy Department’s report. Consensus forecast that crude oil inventory drew -2.5 mmb while both gasoline and distillate inventories gained, by +0.7 mmb and +1.25 mmb respectively.

Gold price rebounded in NY session yesterday and ended day at 1006.3, the third daily close above 1000 amid weakness in USD. Silver also gained +2.3% to close at 17. As world central bankers are going to keep interest rates low for some time, it provides a positive environment for precious metals.

US Oil Inventory

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

Gold’s Outlook Mixed in Near-term But may Rise to 1100 in 6 Months

Gold price continues hovering around 1000 in European morning but with a soft tone. Near-term outlook is mixed but the dollar remains a crucial determinant. USD recovers against the euro (currently trading at 1.459) after Germany’s investor confidence missed expectation. The gauge rose to 57.7, compared with consensus of 59.9, in September from 56.1 a month ago.

In fact, recent decline of the dollar against major currencies looks excessive and a meaningful rebound is expected. If such a rebound materializes, gold price will be at risk. However, the themes such as improved risk appetite, interest rate differential and reserve diversifications away from USD remain in play. As long as these issues continue to be the focus of traders, it’s hard for USD to rise high. If this is the case, downside pressure on gold will be alleviated.

GFMS remains bullish on gold price and forecasts it will reach 1050-1100 in 6 months, ‘on balance, we’re still favorably disposed towards the price in the medium term. That’s mainly because we see it as highly likely that debt monetization and ultra-low interest rates, especially in the US, will at some point feed through to a build in inflationary pressures. Throw in dollar weakness and disappointment over conventional assets as the green shoots argument withers and then gold well over $1,000 becomes perfectly feasible’.

Crude oil price recovers to 69 as investors anticipate another week crude inventory draw in the US. The majority of analysts forecast the US Energy Department will report -2.5-3 mmb decline in crude oil stockpile in the week ended September 11 tomorrow. After market close, the industry-sponsored API will report its estimates which serve as a guide to oil supplies.

In Nigeria, the Movement for the Emancipation of the Niger Delta (MEND) said that it will end its 60-day cease fire today and threatened to resume attacks on oil facilities in the region. Since 2006, the rebel’s attacks have reduced Nigeria’s oil production by more than -20%. Potential supply destruction may help boost oil price in the near-term.

Energy prices have also gained support from US President Obama’s comments that the nation’s economy has been on the road to recovery and the job market is bottoming out. The market’s focus today has turned to retail sales which should have risen +1.8% mom in August after falling -0.1% in the previous month. Auto sales were very strong last month as driven by the government’s ‘cash for clunkers’ program. Moreover, retail gasoline sales, expected to have increased +5% during the month, should have contributed meaningful to the headline reading. The Empire State manufacturing index probably rose to 14 in September from 12.1 in the previous month. This represented the manufacturing in the New York district has expanded for the second consecutive month.

Weekly Fundamental Outlook for Energies and Metals – Consolidation in Crude Oil will Continue in Coming Months

Commodity prices rose modestly last week amid weakness in USD. Reuters/Jefferies CRB Index added +1.4% while USD Index plunged almost -2% to 76.6, the lowest close in a year. Commodities normally trade in opposite direction with the dollar.

The generation-low interest rate in the US (Fed funds rate: 0-0.25%) has caused massive selloff in USD. Against the euro, the greenback plunged for 4 out of 5 trading days and closed -1.9% lower at 1.457, the lowest level in 9 months, for the week. Against the pound, USD also slid -1.6% to 1.6655, a 1-month low, last week.

There were 3 central bank meetings last week. All of the RBNZ, BOE and BOC left interest rates unchanged at 2.5%, 0.5% and 0.25% respectively during the meetings but policymakers indicated brighter economic outlooks for 2H09 and 2010.

In the coming week, the BOJ and SNB will decide on rates. We believe both banks will leave policy rates unchanged at 0.1% and 0.25% respectively.

Crude Oil

After spiking to 72.9, crude oil tumbled to as low as 68.8. The October contract plunged -3.9% to settle at 69.12 Friday, leaving this week’s gain to +1.2% only. The black gold’s decline Friday was accompanied by the dollar’s weakness and strong US economic data. These were in contrary to the usual inverse relationship between commodities and USD.

Crude oil started the week with strong rally but ended it with a slump. We believe the reversal was not only due to profit-taking but also a delayed reaction to the industry news/data released during the week.

Both the industry-sponsored API and the US Energy Department reported huge draw in crude oil inventory but surprising increase in gasoline and distillate stockpiles. Although decline in crude inventory positive, surges in fuel storage should have more than offset bullishness.

Gasoline stockpile rose +2.1 mmb last week to 207 mmb. This had not only come in contrary to consensus of a draw but also halted the 6 consecutive weekly declines. In fact, we believe further increase in stockpile will follow in coming months due to the normal shoulder season in the 4th quarter. Distillate stockpile gained for the 3rd consecutive week. Since 3Q09, inventory has risen for 8 out of 10 weeks. As winter comes, demand for heating oil should increase but this may not be the case this year. Meteorologists suggested the possibility of El Nino which may bring a warmer-than-expected winter in the Northern Hemisphere this year.

OPEC concluded September’s meeting and announced to keep production quotas unchanged Wednesday. Apparently, the meeting was a non-event as the outcome was widely anticipated. However, comments from member countries, especially Saudi Arabia, suggested OPEC’s goal to tighten stock level has been dropped.

After the meeting, Saudi Arabia’s oil minister Ali al-Naimi commented that ‘we are enjoying a good, fair price’ and ‘Inventories are irrelevant, they can be 70 days… It has no bearing on price’. This was compared with the comment in May that industry-held stockpiles in developed nations needed to be brought down to the equivalent of about 52 to 54 days worth of consumption, from 62 days. Concerning compliance, Ali al-Naimi did not see the need to put pressure on overproducing members as ‘people are complying anyway, 70% compliance is great’.

Obviously, the members were satisfied with the current price level and Saudi Arabia explicitly mentioned that the current 68-73 level is ‘going to be there for a while’. Giving the OPEC’s significance in affect oil price, we do believe that the current price level can hold in the medium term. The members will increase output should oil price increases. When price drops, say below 60, large producers such as Saudi can reduce supplies, thereby limiting the fall. In this way, crude oil price will consolidate for some time, given global economy improves in a gradual but uncertain manner.

Natural Gas

In tandem with weakness in the energy complex, natural gas sank -8.5% Friday, paring +15% gains made the previous day, after jumping to as high as 3.42. Gas price rose +9.2% on weekly basis, the biggest jump since May.

Thursday’s rally was driven by US Energy Department’s report which showed that working gas in storage increased by +69 bcf, lower than consensus of +72 bcf, to 3392 bcf in the week ended September 4.Storage was currently +17.4% above 5-year average, also narrowed from +19% in prior weeks.

A week’s data will definitely not alter the bearish gas outlook. In fact, gas supplies remained +495 bcf higher than last year and +503 bcf higher that 5-year average. It’s very likely that US gas storage will exceed all-time high of 3565 bcf made in October 2007.

According to Baker Hughes, oil rig counts reduced to 699 units as of September 11 from 701 in the previous week. This was the first decline after 7 weeks’ increase. Producers scaled back output as gas price is expected to remain low for the rest of the year.

Precious Metals

Gold closed above 1000 for the first time since February last Friday. The yellow metal rallied to as high as 1013.7 before settling at 1006.4, adding +1% during the week. The inverse correlation between gold and USD has increased to -0.8 in recent weeks after falling to -0.5 in mid-August, suggesting dollar’s weakness has contributed to gold’s rally. Central banks have been looking for diversifications away from the dollar. Russia’s central bank’s deputy Chairman Alexei Ulyukayev said that the nation’s gold and foreign currency reserve, the world’s third largest and at the level of around $400B, currently holds 47% in USD, 40% in euro and 10% in GBP. While the amount will remain largely the same by year-end, the composition can be changed and 2-3 more currencies will be added. With USD is at risk of depreciation and inflation expectations loom should the massive stimulus measures unwind, we believe gold would be an attractive investments for the government.

Profit-taking was seen in silver after the metal briefly touched 17 (highest: 17.02) Friday. The benchmark contract was flat during the day but managed to gain +2.5% over the week.

Platinum jumped +2.5% to close at 1322.5, the highest level in 12 months, Friday. Over the week, the benchmark contract gained +4.4%. The noble metal rose for 7 out of 9 trading days in September as driven by recovery in the auto sector.

While the market worried that auto sector will turn weak again as the cash rebate program ended, data suggested that the car industry is recovering. In fact, auto sector is the one that drives the industrial sector out of recession since 2H09. Car makers have become more confident and have expansion plans in the coming year with focus on emerging markets. For instance, Ford Motor said that it will start production in small car in India in 2010 while Harley-Davidson said it will start sales in India next year. Hyundai Motor said that it will raise the annual production capacity at its China plant to 600K from 500K beginning 2010.

Base Metals

The base metal complex moved in a consolidative mode last week. Although macroeconomic data continued to show improvements and China data remained strong, drops in preliminary trade data further suggested China stockpiling has completed for now.

LME lead surged to 2517 earlier in the week as investors worried that smelter closure in China would affect supplies. However, massive selling pressure followed and the metal dived to 2065, losing -10.4% over the week. Zinc lost -3.1% in the week. Traders who long zinc/lead pair trade as we recommended last week (Sep 4) should book in profits.

China’s imports of metal declined for the second month in August. Imports for copper dropped to 325K metric tons, down -20% from a month ago. The July imports decreased 15% from the peak level in June. We believe further decrease will be seen, not only for copper but also other industrial metals, in coming months as China’s RMB 4 trillion stimulus plan has come to an end while the country’s current phase of strategic stockpiling has been completed.

Weakness in Dollar Spurred Demand for Commodities

Although the US inventory report triggered selloff in crude oil price to as low as 70.86, decline in USD boosted demand for commodities again in afternoon session. The WTI October contract added +0.3% to close at 71.31 while the Brent contract gained +0.6% to 69.83. RBOB gasoline closed flat Thursday while heating oil price climbed +0.7% to 1.79. Natural gas jumped +15% to 3.26.

Crude oil inventory drew -5.9 mmb in the week ended September 4 with the Gulf Coast leading the decline. Refinery runs increased by +0.15 mmb to 15.12 mmb while imports dropped -0.48 mmb to 9.1 mmb.

Gasoline stockpiles increased +2.1 mmb while the market had anticipated a draw. Gasoline demand dropped -2.7% on weekly basis to 9.283M. The surge in the previous week was merely due to retailers’ stocking before Labor Day holiday. In coming weeks, gasoline demand should decline further as the driving season has ended. Distillate stockpiles rose +2 mmb as driven by modest increase in import and -0.4% decrease in demand.

Natural gas jumped +15% to settle at 3.26 Thursday, the biggest rally since November 2004 as the US Energy Department reported gas storage gained +69 bcf, less than consensus of +72 bcf , to 3392 bcf in the week ended September 4.

Today in Asia, the energy complex remains firm as China, the world’s growth engine, reported better-than-expected economic data for August. According to the National Statistics Bureau, China’s industrial production rose +12.3% yoy during the month. The People’s Bank of China also reported tht lending increased +15.3% mom to RMB 410.4B in August.

Profit-taking initially dragged gold price to as low as 983.2. However, weakness in the dollar pushed the yellow metal up again. In Asia today, the benchmark contract regains the 1000 level and is currently trading at 1003.6.