Financial Advisor

Commodities Traded With High Volatility but Lacked Direction - Weekly Fundamental Outlook for Energies and Metals

The commodity market continued to focus on macro events instead of fundamentals. Early in the week, oil and industrial metals weakened after decline in China's PMI and ECB's report warning that banks in the Eurozone face 90B euro and 105B euro, respectively, in 2010 and 2011 in net write-downs this year on loans and securities. Risk appetite, however, recovered in the middle of the week as economic data from the US and the Eurozone were generally encouraging.
Bank of Canada raised the overnight rate as expected, by +25 bps, to 0.5% while Reserve Bank of Australia maintained the current cash rate unchanged at 4.5%. Both central banks would be cautious in economic outlook as sovereign crisis in the Eurozone remained highly uncertain.
Focus of the week was US employment report. However, it disappointed the market and triggers selloffs in stocks and commodities. Unemployment rate dropped to 9.7% in May, compared with consensus of 9.8%, from 9.9% in the prior month. However, the number of payrolls increased +431K, while the market had anticipated a bigger rise of +500K. Worse still, private payroll added only +41K, compared with +218k in April and +158K in March. The euro plunged below 1.2 against the dollar after the report. Stock tumbled with DJIA and S&P 500 losing more than -3% at close.

Crude Oil

Crude oil traded with high volatility but lacked direction last week. Earlier in the week, disappointing China PMI triggered worries over slowdown in economic growth and investors dumped oil. Recovery was however seen in the middle of the week and accelerated after inventory data. Yet, price tumbled Friday as US' employment report showed less-than-expected payroll growth in May. The front-month contract of WTI crude oil settled at 71.51 Friday, losing -4.15% from Thursday and -3.33% over the week. Brent crude also plunged, sliding -2.61% on weekly basis to 72.09. After returning to premium over Brent, WTI crude oil fell again to discount as Cushing stock rose further.
According to the US Energy Department, crude oil inventory declined -1.90 mmb (consensus: -0.2 mmb) to 363.2 mmb in the week ended May 28. Cushing stock added modestly, by +0.27 mmb to 37.9 mmb. Moreover, gasoline stockpile drew -2.65 mmb to 219.0 mmb with most of the decline concentrated in PADD II. Production rose +1.65% but offset by +13.4% decline in imports. Demand rose +0.82% to 9.174M bpd. We expect further decline in coming weeks as driving season began last week. Distillate stockpile rose +0.45 mmb to 153.0 mmb. Imports fell -16.6% while production soared +3.68%. Demand edged higher, by +0.25%, at 4.031M bpd.
In the coming week, the US Energy Department (EIA), International Energy Agency (IEA) and the OPEC will release their latest forecasts on demand/supply outlook. In May, the IEA lowered its forecast on world oil demand in 2010 to 86.4M bpd while both the EIA and the OPEC revised their estimates up modestly. As the market has been worrying about impacts of Eurozone's sovereign crisis on global economic growth, June's forecasts should be indicative of the crisis' potential impacts on crude oil demand.
Price movement will continue to be directed by macroeconomic data and developments in the Eurozone. 

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