Weekly Fundamental Outlook for Energies and Metals - USD's Rebound to 3.5-Month High Triggered Long Liquidations on Gold :
USD's rebound continued last week with the dollar index advancing +1.7% over the week to 77.9, the highest level in more than 3 months. Although Dubai World's issue was temporary settled after Abu Dhabi agreed to inject $10B to Dubai World, helping it to repay part of the debts which includes $4.1B on Islamic bonds, as well as payments to the company' contractors, suppliers , interest and operating costs, S&P's downgrade of Greece's credit rating to BBB+ from A- raised investors' risk aversion. The rating agency said that 'the downgrade reflects our opinion that the measures the Greek authorities have recently announced to reduce the high fiscal deficit are unlikely, on their own, to lead to a sustainable reduction in the public debt burden'. However, this is not yet the end of the story as S&P retained Greece in it Credit Watch, suggesting further downgrade may be seen in coming months.
Strength in dollar weighed on commodities. However, the energy complex was not much affected due to bullish inventory report and agency upgrades. Precious metals were hit hard with gold price plunging for the 4rd
Crude Oil
Crude Oil: After the drastic -8.7% selloff in the week ended December 11, crude oil price rebounded, mostly driven by inventory draw, this week. The benchmark contract gained +4.6% to settle at 73.05. Decelerated pace of Cushing stockbuild also narrowed the spread between WTI and Brent crude.
While credit concerns in Dubai and Greece continued to affect sentiment, several positive things happened in energy market. On Tuesday, the OPEC upgraded its forecasts on global oil demand, anticipating it average at 85.13M bpd in 2010, up +1% from 2009 and +0.08% from previous projection. The organization controlling 40% of the world's oil production said that 'Following two years of sharp declines, world oil demand is expected to return to growth in 2010... Fundamentals will continue to be weak in the first half of the year before improving in the second half'. The forecasts echoed IEA's upward revision on December 11. The agency forecast global oil demand to average 86.3M bpd in 2010, up +0.15% from previous estimates, as a result of 'massive fiscal and monetary stimuli implemented by governments across the world'.
The Energy Department's inventory report rocketed oil price. Official data showed that crude oil inventory declined -3.69 mmb to 332.4 mmb in the week ended December 12. Although Cushing stocks continued to increase, the build of +0.78 mmb was significantly less than the increases in previous weeks. At the same time, Distillate stockpile drew -2.95 mmb, a decline similar to what was estimated by API but almost 5 times more than what the market anticipated.
Gasoline stockpile, unfortunately, gained for the 4th consecutive week. However, AAA, biggest motoring organization in the US said that travel during the Christmas and New Year holiday weekends will soar +3.8% yoy, the first gain in 3 years and the biggest increase for any holiday in 2009. This revived hopes for gasoline demand.
Despite all these optimistic news, we remain cautious about energy fundamentals as demand recovery in advanced economy is still sluggish.
Geopolitical tensions in the Middle East provided further support on energy prices. On Friday, Iraq said Iranian forces occupied the area around an oil well 280 miles south of Baghdad. Iraq's National Security Council called on Iran to withdraw its forces from the region and lower its flag. Both countries control a large proportion of the world's oil output. Persistence of the tension may affect supply of oil.
We expect oil price will continue trading between 70 and 75 in the coming week. The major risk is strength in USD. OPEC will meet on December 22 to discuss about output quota and there should not be any change from the current plan.
Natural Gas
Gas price rallied strongly for another week. The benchmark contract surged +12.4% to 5.804 after a +12.6% rise a week ago. The eventual end of injection season and the start of inventory drop increased investors' appetite.
Natural gas storage dropped -207 bcf to 3566 bcf in the week ended December 11. This was the second consecutive decline and beat market expectation of a fall of -178 bcf.
On the other hand, the number of gas rigs increased +16 units to 773 in the ended December 18. This was the biggest rise since November 22. We believe more drilling activities will take place should gas price rise further.
Apart from drilling activities, strong rally in US gas price accelerated the pace of LNG imports. Together with increase in liquefaction capacity next year, recovery in gas demand in US will not be able to absorb they huge import growth. This poses downside risk to gas price in the coming year.
Precious Metals
Gold price declined -0.6% to close at 1113.7 last week amid strong rebound in dollar. In November, the yellow metal was buoyed by aggressive central bank buying and speculative long positions were pushed to record high levels. However, in December, the theme was changed to sovereignty risk/credit risk. This caused panic sales in risky assets. Although gold has been regarded as safe-haven, it's classification in the commodity sector has increased its correlation with other commodities which are being dumped during crisis period. Together with profit-taking and long liquidation, a deep correction (gold has fallen -9.3% from the peak of 1227.5 made in November) is inevitable.
As we approach 2010, whether gold price can maintain the strength depends on investment demand and central banks' interest in buying gold. In our opinion, renewed weakness in USD, concerns about inflation and erratic global economic recovery should help lift gold price further.
USD's rebound continued last week with the dollar index advancing +1.7% over the week to 77.9, the highest level in more than 3 months. Although Dubai World's issue was temporary settled after Abu Dhabi agreed to inject $10B to Dubai World, helping it to repay part of the debts which includes $4.1B on Islamic bonds, as well as payments to the company' contractors, suppliers , interest and operating costs, S&P's downgrade of Greece's credit rating to BBB+ from A- raised investors' risk aversion. The rating agency said that 'the downgrade reflects our opinion that the measures the Greek authorities have recently announced to reduce the high fiscal deficit are unlikely, on their own, to lead to a sustainable reduction in the public debt burden'. However, this is not yet the end of the story as S&P retained Greece in it Credit Watch, suggesting further downgrade may be seen in coming months.
Strength in dollar weighed on commodities. However, the energy complex was not much affected due to bullish inventory report and agency upgrades. Precious metals were hit hard with gold price plunging for the 4rd
Crude Oil
Crude Oil: After the drastic -8.7% selloff in the week ended December 11, crude oil price rebounded, mostly driven by inventory draw, this week. The benchmark contract gained +4.6% to settle at 73.05. Decelerated pace of Cushing stockbuild also narrowed the spread between WTI and Brent crude.
While credit concerns in Dubai and Greece continued to affect sentiment, several positive things happened in energy market. On Tuesday, the OPEC upgraded its forecasts on global oil demand, anticipating it average at 85.13M bpd in 2010, up +1% from 2009 and +0.08% from previous projection. The organization controlling 40% of the world's oil production said that 'Following two years of sharp declines, world oil demand is expected to return to growth in 2010... Fundamentals will continue to be weak in the first half of the year before improving in the second half'. The forecasts echoed IEA's upward revision on December 11. The agency forecast global oil demand to average 86.3M bpd in 2010, up +0.15% from previous estimates, as a result of 'massive fiscal and monetary stimuli implemented by governments across the world'.
The Energy Department's inventory report rocketed oil price. Official data showed that crude oil inventory declined -3.69 mmb to 332.4 mmb in the week ended December 12. Although Cushing stocks continued to increase, the build of +0.78 mmb was significantly less than the increases in previous weeks. At the same time, Distillate stockpile drew -2.95 mmb, a decline similar to what was estimated by API but almost 5 times more than what the market anticipated.
Gasoline stockpile, unfortunately, gained for the 4th consecutive week. However, AAA, biggest motoring organization in the US said that travel during the Christmas and New Year holiday weekends will soar +3.8% yoy, the first gain in 3 years and the biggest increase for any holiday in 2009. This revived hopes for gasoline demand.
Despite all these optimistic news, we remain cautious about energy fundamentals as demand recovery in advanced economy is still sluggish.
Geopolitical tensions in the Middle East provided further support on energy prices. On Friday, Iraq said Iranian forces occupied the area around an oil well 280 miles south of Baghdad. Iraq's National Security Council called on Iran to withdraw its forces from the region and lower its flag. Both countries control a large proportion of the world's oil output. Persistence of the tension may affect supply of oil.
We expect oil price will continue trading between 70 and 75 in the coming week. The major risk is strength in USD. OPEC will meet on December 22 to discuss about output quota and there should not be any change from the current plan.
Natural Gas
Gas price rallied strongly for another week. The benchmark contract surged +12.4% to 5.804 after a +12.6% rise a week ago. The eventual end of injection season and the start of inventory drop increased investors' appetite.
Natural gas storage dropped -207 bcf to 3566 bcf in the week ended December 11. This was the second consecutive decline and beat market expectation of a fall of -178 bcf.
On the other hand, the number of gas rigs increased +16 units to 773 in the ended December 18. This was the biggest rise since November 22. We believe more drilling activities will take place should gas price rise further.
Apart from drilling activities, strong rally in US gas price accelerated the pace of LNG imports. Together with increase in liquefaction capacity next year, recovery in gas demand in US will not be able to absorb they huge import growth. This poses downside risk to gas price in the coming year.
Precious Metals
Gold price declined -0.6% to close at 1113.7 last week amid strong rebound in dollar. In November, the yellow metal was buoyed by aggressive central bank buying and speculative long positions were pushed to record high levels. However, in December, the theme was changed to sovereignty risk/credit risk. This caused panic sales in risky assets. Although gold has been regarded as safe-haven, it's classification in the commodity sector has increased its correlation with other commodities which are being dumped during crisis period. Together with profit-taking and long liquidation, a deep correction (gold has fallen -9.3% from the peak of 1227.5 made in November) is inevitable.
As we approach 2010, whether gold price can maintain the strength depends on investment demand and central banks' interest in buying gold. In our opinion, renewed weakness in USD, concerns about inflation and erratic global economic recovery should help lift gold price further.
