Last week was eventful as the market was flooded with economic data, rate decisions from central banks (RBA, ECB and BOE) and fast-changing sentiment towards Greece's issue. The Fed also released the minutes for March's FOMC meeting. Regarding oil-specific news, official data on US oil inventory was disappointing while the Energy Department revised slightly downward its demand forecasts.
The market started strongly after Easter holidays as investors received strong manufacturing data from various economies. Oil and metal prices advanced to highest levels in a year amid confidence on global economic growth outlook. However, the rallies were not sustainable and high volatility was triggered by mixed sentiment towards Greece's issue.
The latest news on Greece is that Fitch Rating, on Friday, cut the country's long-term foreign and local currency issuer default ratings, by 2 levels, to BBB- from BBB+ with 'negative' outlook. Interestingly, the euro did not tumble after the news. Rather, it jumped +1.06% against the dollar and +0.8% against Japanese yen amid speculations that the EU/IMF alliance, despite Germany's objection, will provide loans at below-market rates to the debt-stricken economy.
Crude Oil
Crude oil extended rally earlier in the week after price broke the 83.95- resistance on April 1 as US employment data beat market expectations. Bullishness was supported by strong PMI readings in the US, Europe, China and India. The front-month WTI contract surged to 87.09, an 18-month high, on Tuesday before disappointing inventory data and renewed concerns over Greece triggered selloff. The black gold fell for 3 consecutive days last week and settled at 84.92 Friday, barely up +0.06% over the week.
According to the US Energy Department (EIA) crude oil inventory rose for a 10th consecutive week, by +1.98 mmb, to 356.2 mmb. Although utilization rate increased by more than +2%, it was offset by surge in imports (+5.5%).
Disappointedly, distillate stockpile also rose while the market had anticipated an over +1 mmb draw. The build was driven by +13.1% increase in production which was partly compensated by -52.2% drop in imports. The build has brought distillate inventory +24% above 5-year average.
Decline in gasoline stockpile, however, exceeded market expectations. The draw was in spite of rises in both production and imports during the week. Demand improved slightly.
The report indicates the US energy market remains fragile and that recent rally in crude oil price has been driven by robust sentiment.
In another report, the US Energy Department revised slightly lower its forecasts on 2010 and 2011 global oil demand to 85.66M bpd (previous: 85.71M bpd) and 86.87M bpd (previous: 86.69M bpd), respectively. The Department revised it assessment for Europe downward and this was partly compensated by upward revision in Asian demand outlook. The International Energy Department and OPEC will publish their forecasts next week. We do not expect significant changes in outlook.
News reported that Saudi Arabian Oil Co., the world's largest state-owned oil company, will supply full volumes of crude oil to Asia for loading in May, after a -10% cut on nominated volumes in April. The company's decision to provide full volumes is viewed by some market participants as a means to take down oil prices.
Saudi Arabia cut its production by -0.024M bpd to 8.117M bpd in February. However, this remained +0.066M bpd above its daily production target of 8.051M bpd. OPEC's compliance with its quotas dropped to 53.2% in February from 55.9% in the prior month, according the group. 11 members of the group decided to limit production to 26.84M bpd late 2008 to rescue oil price.
Natural Gas
Gas price rose for the first time in 4 days but this should not change the long-term downtrend. The benchmark contract lost -0.39% on weekly basis. Risk to gas is to the downside as a break below 4 dollar has worsened the outlook.
Lack of encouraging fundamentals will allow price to go lower. According to the US Energy Department, gas stockpiles rose 31 bcf to 1669 bcf in the week ended April 2, compared with market expectations of a +28 bcf increase. The build has widened the inventory gap to 5-year average to 12% from 11% in the prior week.
In the Short-term Energy Report, EIA forecast total natural gas consumption to increase by +1.9% to 63.8 Bcf/d in 2010, followed by a decline of -0.6% in 2011. EIA revised up gas consumption in the electric power sector for the second month in April. However, it stated that the revision reflected expectations that 'lower natural gas prices relative to coal prices will increase the utilization of natural-gas-fired generating facilities in the baseload power supply'.
EIA's forecast for 2011 reflected consumption declines in all sectors except the industrial sector. 'The projected return to near-normal weather reduces consumption in the residential and commercial sectors, while higher natural gas prices reverse the coal-to-gas switching trend observed in 2009 and forecast to continue in 2010. Consumption in the industrial sector, supported by continued economic growth, is projected to increase by +1.7% in 2011'.
Concerning production, EIA expects total marketed natural gas production to increase +0.7% to 60.9 Bcf/d in 2010, followed by a drop of -1.2% in 2011. EIA anticipated domestic production growth would decline (by -0.5 Bcf/d) in 2010 in March's projection.
Concerning production, EIA expects total marketed natural gas production to increase +0.7% to 60.9 Bcf/d in 2010, followed by a drop of -1.2% in 2011. EIA anticipated domestic production growth would decline (by -0.5 Bcf/d) in 2010 in March's projection.
In fact, accuracy of EIA's forecasts is doubtful. Earlier in the week, the US Energy Department said that some of its gas output numbers were inflated in the monthly release as new drilling techniques and booming of small shale gas producers have increased difficulties of estimating the data. The Department will use more up-to-date data to estimate natural gas output, starting with the next report due out on April 29. The news suggests that the actual gas supply in the US may not be as huge as previously thought and this helped boost gas price. Another reason for the price rally was certainly strong US economic data.
Precious Metals
Gold extended its 7-day winning streak Friday amid euro’s strength and/or Greece’s woe. The benchmark contract soared to a 4-month high at 1165.8 before settling at 1161.9, gaining +0.78% and +3.18% on daily and weekly basis respectively.
While it seems contradictory to say gold benefits from both euro's strength and Greece's sovereign crisis, this is what we are experiencing currently. The key factor driving gold high is investors' seeking of a shelter from fiat currency in the midst of uncertainty and huge fiscal deficits in major economies.
Recent rally has brought gold to a new 2010-high against the dollar and a record high against the euro. While we are impressed by gold's strength in the face of slumps in the euro, we caution a price correction in the near-term.
It's widely known that gold and EURUSD are highly correlated. However, recent gold strength despite euro's weakness has derailed the relationship. Should the correlation resume we would see selloff in gold, given our view that the euro will remain under pressure. Nevertheless, we remain bullish in the long-term outlook for gold and advise to buy on pullbacks. Physical demand in gold was strong last week. Bullion holdings in SPDR Gold Trust, the world's largest gold exchange-traded fund, hit an all-time high of 36, 666, 045 oz as of April 8 April, surpassing the level of 36, 460,190 oz recorded on 1 June 2009. This signaled retail investors have resumed interest in gold investment.
Both platinum and palladium were strong with prices surging above 1700 and 500 respectively. PGMs outperformed gold and silver in 1Q10 and the situation may persist as we enter into the second quarter. While investment demands are crucial for pushing prices higher, fundamentals in platinum and palladium are strong. Apart from global growth in industrial activities, as well as recovery in auto sector, especially in the US and China, implementation of tighter emission legislation globally should further boost auto-catalyst demand, thus tightening PGM supplies.
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