Commodities rebounded generally last week, mainly helped by Greece's approval of the austerity measures and partly by some encouraging US economic data. Oil prices plunged earlier in the week after the IEA announced to release 60 mmb of strategic petroleum reserves (SPR)in 30 days. Yet, the impact faded as market sentiment improved later in the week and as the agency released more details of its plan.
The Fed's 600B bond-buying program (QE2) ended on June 30 and there have been debates on whether the Fed should introduce something called QE3 as the US economy has shown signs of slowdown. We believe it would be too fast for the Fed to implement further easing measures as the impact of QE2 has yet to be known. Fed Chairman Ben Bernanke said that 'a little bit of time' is needed to 'see what happens would be useful 'before deciding the next step. St Louis Fed President James Bullard said that it might take up to a year to determine the effectiveness of QE2. We believe the end of QE2 without follow-through of more money pumping measures is negative for gold as cheap money for gold investment evaporates. That being said, the precious metal should remain supported by physical demand after the seasonally weak 3Q and investment demand in the longer-term.
For the coming week, the focus will be on 3 central bank meetings (RBA, ECB and BOE). We expect both the RBA and the BOE will leave interest rates unchanged while the ECB will raise the main refinancing rate to 1.5% to combat inflation.
Crude Oil
The complex rose solidly with WTI and Brent crude futures surging +4.15% and +6.33% respectively. Fuel prices also strengthened with US heating oil and gasoline prices jumping over +6.33% and +7.06% respectively. Oil prices have already rebounded to levels before the IEA's announcement of releasing strategic reserves.
After announcing on June 23 the release of 60 mmb of oil in July, the IEA gave more details on contributions by participating countries in this collective action last week. Among 12 out of the 28 member countries participated in the program, the US, Germany, South Korea, Belgium and the Netherlands will issue tenders to sell government reserves while oil companies in Japan, France, the UK, Italy, Spain, Turkey, Poland and Belgium will sell their reserves. The report unveiled that only 39 mmb (around 64%) of oil out of the total emergency release will be sold from government-controlled inventories, suggesting the impact of the IEA's move on oi prices should be less pronounced than previously anticipated.
Another reason for IEA's failure to bring down oil prices is due to historical facts that the actual amount of oil released to the market is often less than the potential release. Before June 23, the IEA has adopted 2 coordinated oil actions, one in 1991, at the time of the first Gulf War, and the other in 2005, after Hurricane Katrina destroyed oil facilities in the US Gulf. In January 1991, the IEA activated its Contingency Plan to make available to the market 2.5M bpd of oil, comprising of 2M bpd of stock-draw, 0.2M bpd of demand restraint and 0.2M bpd of fuel switching and surge production. The US government offered 33.75 mmb only 17.3 mmb was bought. In 2005, the agency implemented a collective action which made available to the market 60 mmb of crude oil and oil products, in response to 'concerns about interruptions to oil supply as a result of the severe hurricane damage caused by Hurricanes Katrina and Rita in the US Gulf of Mexico'. Less than half of the reserve released was tapped. Therefore, it's likely that the actual amount bought would fall short of the 60 mmb offered.
Natural Gas
US gas price moved steadily, gaining +1.94% during the week, due to higher-than-normal temperature and smaller-than-expected increase in storage. According to the DOE/EIA, gas inventory climbed +78 bcf to 2 432 bcf in the week ended June 24. Stocks were -243 bcf less than the same period last year and -63 bcf, or -2.5% below the 5-year average of 2 495 bcf.
Separately, Baker Hughes recorded the number of gas rigs added +1 unit to 874 units in the week ended July 1.
Precious Metals
Gold slumped on Friday as approval the Greek austerity bill averted immediate default and hence reduced demand for safe-haven assets. The yellow metal plummeted to 6-week low of 1478.3 before ending the day at 1482.6. Thanks to the steady movement in the remainder of the week, the benchmark contract slipped-1.21%, avoiding an abrupt weekly loss. Silver followed gold's coattail and plunged to as low as 33.47 before settling at 33.71 on Friday. Due to weaker fundamentals and more volatile nature, the white metal dropped -2.73% during the week.
In PGMs, platinum and palladium climbed +2.16% and +3.55% respectively. While boosted by the rise in market sentiment, investors also viewed ongoing wage negotiations between mining companies and labors as a threat to tighter output.
According to latest reports by Johnson Matthey and GFMS, the demand/supply outlook for platinum will be largely balanced for platinum while that for palladium will be in deficit. Johnson Matthey forecasts platinum supply will rise modestly this year. On the demand side, gross automotive and industrial demand for platinum will increase as economic growth continues. However, the aftermath of earthquake and tsunami in Japan may have 'some lingering effects locally'. Jewelry and investment demand will remain resilient. The GFMS expects platinum supply in North America will rise strongly while that in South Africa and Russia will be stable. Meanwhile, autocatalytic recycling as well as scrap will climb higher. Demand will rise but should stay below pre-crisis level. While gains in autocatalytic and industrial demand will be offset by increase in supply but investment demand will remain resilient.
Concerning palladium, Johnson Matthey expects supplies will decrease while demand will grow as driven by the automotive and chemical sectors in emerging markets. Jewelry demand in China and global investment outlook are, however, less certain. The GFMS forecasts palladium supply to rise mainly from mine production in North America and surge in scraps. Autocatalytic demand will rise on higher gasoline-fuelled vehicle production. Geographically, growth in the US will be weaker than that in Europe. Growth in China may slow significantly while the aftermath in Japanese disasters is 'considerable'. Jewelry and retail investment are expected to decline.
source:Baker Hughes
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