Weekly Fundamentals - Gold Hits All-Time Highs, Again and Again
The commodity market experienced huge volatility last week. A series of factors sent prices to diverging directions. Earlier in the week, the IMF revised down its growth forecasts for the US, Japan and the UK while leaving global GDP forecasts unchanged. The world lender warned that risks posed by disruptions on oil production and surges in oil prices on global economic growth are skewed to the downside. It comments were echoed by the International Oil Agency (IEA) which stated that oil prices above 100 would hurt demand. Oil was dumped earlier in the week but then recovered after a report saying Saudi Arabia has cut production this month, reversing the outputs it increased to offset Libya's oil in March.
Sovereign debt concerns in the European periphery intensified as German Finance Minister Wolfgang Schaeuble said that Greece may have to restructure its debts and Moody's downgraded Ireland's credit rating by 2 notches to by 2 levels to Baa1 with 'negative' outlook. Besides the Eurozone, debt problems in the US resurface as President Obama pledged to reduce deficits by $4 trillion within 12 years, a plan less aggressive than some other policymakers suggested. Ongoing debt concerns benefit hard assets, i.e. gold.
Inflation in emerging countries remains elevated. Headline CPI in both China and India exceeded expectations, jumping to +5.4% and +8.98%, respectively, in March. Inflationary pressures heightened in advanced economies. In the US, headline CPI climbed +0.5% m/m in March, in line with market expectations and same as February's increase. From a year ago, inflation rose +2.7% y/y (consensus: +2.6%), up from a +2.1% rise in the prior month. In the Eurozone, inflation was revised higher +2.7% in March. The ECB raised the main refinancing rate at the April meeting in an attempt to combat inflation. Rising inflation and inflationary expectations send gold higher.
Crude Oil
Oil plummeted early last week as the IMF warned of the threats in global economic slowdown by high commodity prices. At the April World Economic Outlook (WEO), the world lender stated that rising food and commodity prices pose 'a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa'. While disruptions on oil production and surges in oil prices so far would have 'only mild effects on economic activity', risks are on the 'downside' with 'falling spare oil production capacity'. The International Energy Agency (IEA) echoed in its monthly report that oil prices above $100/bbl are detrimental to growth. Oil prices were also pressured as 3 major oil agencies (EIA, IEA and OPEC) increased their forecasts on non-OPEC supplies. Despite a recovery since the middle of the week, the oil market generally recorded a loss on weekly basis.
Gasoline was an exception with the front-month Nymex contract gaining modestly, by +0.87% to settle at 3.289. The astonishing -7 mmb decline in gasoline stockpile in the week ended Apr 8 was probably a key price driver. While it's normal for gasoline inventory to decline ahead of summer, recent draws have been huge. The chart below shows that gasoline inventory fell below last year's level and 5-year average in early and late March respectively. Investors may be amazed on the phenomenon as US gasoline demand growth has been only mild since the beginning of the year. Demand slipped -1.33% in January, followed by an average +0.48% increase in February and March. Note, however, that, growth rates for February and March were calculated using weekly data which are subject to revisions (usually downward) in coming months.
It's suggested that a large chunk of gasoline went to Mexico as well as some other Latin American countries including Argentina and Brazil. According to the DOE/EIA, over 90% of the exports are shipped from the US Gulf Coast and about 70% of the exports go to Mexico.
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