Alan's Finance Blog

Crude Reverses Gains as China Raises Yield and Weather May Get Warmer

Crude oil reversed gains after failing to test 84 in NY session Monday. The February contract ended the day at 82.52, down -0.3%. Currently trading at 81.9, the decline accelerates as the central bank of China rolled out more tightening and weather forecasts suggested temperature will turn warmer later this week.

The People’s Bank of China (PBOC) sold 1-year bills at a yield of 1.8434% in open market operations. The yield has been staying at 1.7605% since August 2009. This may be a sign that China is trying to tighten the market more aggressively than expected. Last Thursday, PBOC offered RMB 60B worth of 3-month bills at 1.3684% in its weekly open-market operation, +4 bps higher than the rate kept since August. The move indicates that China would continue to guide market interest rates higher and absorb liquidity from the market through issuance of central bank notes.

Weather forecasts said that temperature will return to normal in eastern cities such as New York and Boston later this week. This news dampened bullishness as recent rally in energy price was driven by extremely cold weather in the Northern hemisphere. Traders believed the adverse weather condition should boost demand for energy.

Gold price settled at 1151.4, up +1%, after surging to as high as 1163 yesterday. A weak dollar may help push the yellow metal higher this week. Platinum extends its rally to 1602.5 in Asian session today. The benchmark outperformed others as the launch of the first US ETF spurred investment demand.

Last Friday, ETF Securities’ first US platinum and palladium ETFs started trading with strong volume. Initial allocation of the platinum and palladium ETFs were 9,969 oz and 9,996 oz, respectively, volume traded on the first day (reflecting both primary and secondary trade) reached 414,742 shares for platinum and 294,943 shares for palladium. Platinum holdings in the non-US ETFs also rose modestly by +158 oz to hit a fresh high, while palladium holdings fell by -5.5k oz to 1.155M oz.

Source: Oil N Gold

Strong China Imports Pushed Crude Price Higher

Crude oil price rose to as high as 83.67 after China reported strong imports in December. In 2009, robust demand in emerging countries, especially China, was the major driver for energy prices. We expect the strength to continue this year although withdrawal of stimulus measures may slow the pace modestly.

According to the Chinese Customs, crude oil imports surged +24% to 21.26M metric tons in December. On annual basis, the nation imported 203.8M tons in 2009, compared with 178.9M metric tons in the previous year.

Industrial activities in Asia has been picking up rapidly after slumping to very low levels in early 2009 as driven massive government stimulus plans. In China , the government implemented a plan worth $506B to stimulate growth, particularly in infrastructure and construction sectors. As a whole, the nation’s GDP is expected to grow by more than +8%.

The market’s focus is not policy tightening this year. Demand outlook for commodities will be affected if China starts tightening. However, we believe the government will only exit from the stimulus plans after a self-sustainable growth is seen in the economy. Therefore, the negative impact on commodity prices should not be too much.

Gold price rallied for the second consecutive day amid USD’s correction. The February contract for the yellow metal surged to a 1-month high of 1163 as the dollar’s decline for 3-low against the euro spurred gold buying. Disappointment in December employment report lowered expectations for a Fed rate hike as early as in June. Traders liquidated their long positions in USD and turned short.

Commitments of Traders:

Crude Oil: Net speculative long positions rose to 108.8Kcontracts, the highest 10 weeks, as price surged amid strong economic data and extremely cold weather. Although elevated inventory levels suggested energy fundamentals remained dismal, correction in USD indicated crude investment might still be robust in coming weeks

Natural Gas: Net speculative short positions surged to 156.6K contracts. Despite decline in gas inventory, the ample supply continued to depress price

Gold: Net speculative long positions declined 227.8K contract despite rally in price. Although net longs in gold have plummeted more than -10% from the peak in November, they remained at high levels

Silver: Net speculative long positions in silver rebounded to 395K last week. Silver price rose to a 1-month high as signs of global economic recovery spurred speculations that demand for silver in industrial activities should rise

Platinum: Net longs soared to 20.4K contracts, the highest level in 4 weeks. While strong auto data in China and OECD economies were supportive to price, launch of the first-ever platinum ETF in the US triggered investment demand

Energies Extend Gains as Strong China Trade Drives Sentiment

Crude oil extends rally to 83.95 in European session. Weakness in USD, abnormally cold weather in the Northern hemisphere and strong demand from China are pushing energy prices higher. Oil products also advance. Heating oil surges to 2.224. The benchmark contract has rallied in the past 4 weeks as government reports showed declines in distillate inventory. Gasoline price also rises to 2.185 as the rally accelerated after an upside break of 2.11 on January 4.

Attacks in Nigeria once again spurred worries about production disruption. Chevron reported that its Makaraba-Uyonana pipe was breached on January 8. This forced the company to shut down 20B bpd of crude oil production.

Rebel groups who want a share of oil revenues have been a threat to Nigeria’s oil production. Among them, the Movement for the Emancipation of the Niger Delta (MEND) is the largest group. The

MEND signed an indefinite ceasefire on October 25, 2009 and agreed to have peaceful talk with the government. However, it resumed attack in mid-December as member was dissatisfied with the progress of the negotiations.

Gold stays strong with other commodities as USD weakens. The February contract rose to as high as 1163 before pulling back to 1157.

USD’s rally against the euro accelerated after breaching the cluster of 1.4218-1.448. Currently trading at 1.453, the greenback has plummeted to a 3-week low against the euro as unexpected decline in payrolls evaporated traders’ hope for Fed’s tightening in 1H10.

Stock markets in both Asia and Europe advance as driven by robust trade data in China. Apart from strong commodity imports, export growth from China, up +17.7%, indicated global economic recovery is taking place in a fast pace.

In Asia, the MSCI Asia Pacific Index ex Japan rose +1.2%. Benchmark indices in Australia rose +0.8% while indices for both China and Hong Kong rose +0.5%. In European morning, UK’s FTSE 100 Index rises +0.6% to 5565.2, Germany’s DAX adds +0.4% to 6065 while France’ CAC 40 gains +0.7% to 4074.

Gold Price Made Fresh Record High and Confirmed Long-term Uptrend

Gold price set a new record high Tuesday amid USD’s weakness and renewed inflation worries. The benchmark contract for the yellow metal breached the peak of 1033.9 made in March 2008 and surged to as high as 1045. Price eventually closed +2.2% higher at 1039.7. Others in the precious metal complex also strengthened with silver jumping +4.6% to 17.3 and platinum gaining +1.8% to 1025.3.

USD tumbled Tuesday as RBA’s rate hike heightened the rate differential concerns. Moreover, the dollar was pressured after UK’s Independent newspaper said that the Gulf oil states were talking with Russia, China, Japan and France to replace dollar with other currencies in 9 years. Although the news was denied by Saudi Arabia and Russia, the dollar failed to rebound.

Today in Asia, USD pares losses as Kansas Fed President Thomas Hoenig said that the central bank will need to ‘remove the very accommodative policy sooner rather than later’. Gold price trades narrowly around yesterday’s close. There’s possibility for the yellow metal to pullback after rallying almost +4% in the past 3 days. Silver and platinum continues to extend gains but we believe the rise silver should stabilize as it has gained +7% over the past 2 days.

Crude oil added +0.7% to settle at 70.88. The benchmark contract surged to as high as 71.97 Tuesday. Others in the energy complex had mixed performance. RBOB gasoline and heating oil gained +1.1% and +1.2% respectively while natural gas slid -2.2%.

After market close, API reported its estimates on oil inventory. Crude oil inventory declined +0.3% mmb, compared with consensus of a +2.2 mmb build, to 339.4 mmb in the week ended October 2. Rise in refinery runs slightly outweighed increase in crude imports. Cushing stocks dropped -0.22 mmb. The pleasant surprise came from distillate stockpile which drew -2.91 mmb to167.8 mmb. The market had anticipated another week of build. Gasoline stockpile rose +0.54 mmb, compared with forecast of a +0.71 mmb increase.

The above readings were supportive for oil price and increase the possibility that we will get a set of positive results in the report by the US Energy Department. Crude inventory probably gained +2mmb while gasoline built +1.4 mmb. For distillate, stockpile might have declined -0.4 mmb after months of increases.

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

Commodities Under Pressure as USD Rebounds and Pace of Recovery May Slow

Crude oil price remains under pressure in European morning on stock markets’ decline and USD’s rebound. As recent price rallies have brought risky assets’ valuations to stretched levels, investors have become extremely vulnerable to bad economic news and trade restrictions between China and the US immediately triggered worries about recovery.

Inline with the Asian market, stocks open lower in Europe with UK’s FTSE 100 Index sliding -0.7% to 4977. Germany’s DAX and France’s CAC 40 also drop -0.9% and -1% to 5575 and 3698 respectively. Economic data released in the region was largely as market anticipations. Industrial production in the Eurozone contracted -0.3% mom in Jul following a -0.2% decline in the previous month. On annual basis, the gauge declined -15.9%, slightly better than consensus of -16.7%. While continued to fall, fall of employment in the 16-nation region moderated to -0.2% qoq in2Q09 compared a -0.8% decline in the prior quarter.

Earlier in Asia, the MSCI Asia Pacific Index plunged -1.8% after making a 1-year high last week. Japan’s Nikkei 225 Stock Average lost -2.3% to settle at 10202. Strength in Japanese yen spurred concerns about the nation’s recovery. In China, the Shanghai Composite Index gained +1.2% to 3027 as led by the +10% rally of Shandong Minhe Animal Husbandry after China announced investigation of US’ chicken imports.

The dollar rebounds against major currencies after last week’s severe selloff. Against the euro, USD recovered to 1.454 from a 9-month low. After surging for several months, euro’s valuation looks stretched and a near-term correction will likely be seen.

Several Fed officials, Duke, Lacker and Yellen, will speak about financial regulations and economic outlook, While we believe main themes will remain largely the same as what the Fed said during the FOMC in September: better economic outlook but recovery will be gradual and uncertain, expansionary monetary policies should remain for some more time. Any change in tones, either more bullish or bearish, will move the currency and hence commodity prices.

Gold price falls below 1000 while silver also plunges -1.6% to 16.4 as USD strengthens. For gold, investment demand has been the crucial price driver as physical demand remains sluggish since the beginning of the year. We will monitor to see if there’re capitals flowing out of the gold ETFs and/or futures after weeks of inflows. Should this be the case, investors should take profits from their long positions first.