Crude Rebounds after Sliding Below OPEC's Preferred Range

Crude oil recovers after breaking below 70, the lower boundary of OPEC's preferred price range. Current level of 71.8 is +2.8% higher that the new 3-month low, at 69.82, made earlier in Asian session. However, the rebound is mild when compared with the -17% selloff recorded since the beginning of the month.

While debt-laden countries such as Spain, Portugal and Italy proposed additional measures to reduce deficits, the market begin to worry about the negative impacts of these measures on economic growth. Tighter fiscal policy will inevitably damped domestic demand while further weakness in the euro will boost exports. The net impact is uncertain but we expect economic forecasters will downgrade growth outlook in the 16-nation Eurozone for 2010 and 2011.

$70/bbl is a psychological support for WTI crude oil as various OPEC oil ministers expressed they were content with a price above that level. Qatari Energy Minister Abdullah bin Hamad al-Attiyah said today that price below 70 would discourage investment in deepwater production. Last week, Kuwaiti Minister Ahmad Al-Abdullah Al-Ahmad Al-Sabah said the organization may call for an emergency meeting before the general meeting on October 14 should oil price drops below 65. Saudi Arabia's Oil Minister Ali al-Naimi said in April that oil price in a range of 70-80 is 'as close to perfect as possible'. King Abdullah also mentioned 75 is a fair price for consumers and producers.

Gasoline and distillate cracks have reached 15-month highs despite fuel inventories remain at historical highs. The phenomenon has been driven by severe weakness in crude oil price. Gasoline crack surged for 7 consecutive days to 17.88/bbl while distillate crack rose to 15.14/bbl last Thursday below pulling back to 14.94 Friday. The rally may continue, especially for gasoline as the US driving season begins in the last week of May. There's possibility that gasoline crack will rise above 20 but it will eventually revert to 12-13.

Gold changes little from Friday's close of 1227.8. Profit-taking is seen but investment demand remains high. In the near-term price is vulnerable to correction on long liquidation and increase in scrap supply. In the medium- to long-term, however, we stay bullish in gold's outlook and believe flight to safe-haven asset should support price as long as worries over sovereign crisis linger.