Commodity market was affected by policy uncertainty last week. The Fed Chairman Ben Bernanke testified before the Committee on Financial Services on the central bank's exit strategy. Bernanke expected to consider 'a modest increase in the spread between the discount rate and the target federal funds rate' before long, while reverse repos will be among the foremost tools to drain massive liquidity.
In Europe, EU leaders pledged to provide support to Greece in overcoming the debt crisis. However, no concrete plans were mentioned. Risky assets such as equities and commodities rallied strongly earlier in the week before the meeting was held but gains were capped after the EU statement proved to be a non-event. The euro plummeted against the dollar and the Japanese as it's widely expected that EU's assistance to Greece and/or other countries with sovereign risks would result in weakness in the currency.
Towards the end of the week, the People's Bank of China announced to raise the required reserve ratio for commercial banks by +50bps. This was the second time in 2010 that the central bank raise reserve ratio as a means to slow the pace of lending. Investors were upset by the measure as it might slow down growth and demand for commodities.
Despite the strength against the euro, the dollar index slid -0.16%, the first time in 4 weeks, to close at 80.31. Reuters/Jefferies CRB Index +3.6% to settle at 267.92.
Crude Oil
The front-month contract for WTI crude dropped for the first time in 5 days on Friday as China's central bank increased required reserve ratio in commercial banks, signaling further cooling of lending. The benchmark contract plummeted to as low as 72.66 after the release of US inventory data. However, price rebounded shortly and settled at 74.13, dropping -1.5% for the day but rising +4.2% for the week.
Crude stockpile rose +2.42 mmb to 331.4 mmb in the week ended February 5. The higher-than-expected increase was driven by low refinery runs which, although rebounded to 79.11% last week, remained at historical low level.
Precious Metals
Gold price pared gains Friday amid broad-based decline in the commodity sector as well as selloff in the euro. The benchmark contract for the yellow metal settled at 1090 after plunging to as low as 1078.1. On weekly basis, the contract gained +3.5%.
Despite gold's strong correlation with EURUSD, the yellow metal managed to rise when the euro dropped against the dollar. We believe it's the heightened volatility in EURUSD that has driven investors to gold.
Although gold has the risk of weakening further in the near-term amid USD's strength, we see dips as buying opportunities as central banks in emerging markets still have strong interests in accumulating gold. Also, strength in USD should diminish as soon as the Fed hikes interest rate, probably by late-2010.
Silver gained +4.2% to close at 15.45 last week. However, since the beginning of the correction in mid-January, silver has dived -17% in month while gold has dropped -5%. As driven by worries about slowdown in global economic recovery, silver has underperformed gold so far this year. However, the sharp fall has brought the gold/silver ratio 19% higher than 5-year average, suggesting upside risk for silver against gold.
PGMs rose last week with platinum rising +2.4% and palladium +5%, after declining for 3 consecutive weeks. We are optimistic on PGMs' outlook in this year and view previous corrections as profit-taking after the rigorous rallies in mid-December to mid-January. Both robust investment demand and tightness in the market are supportive for prices.
Base Metals
Base metals rebounded strongly as risk appetite improved. Despite pullbacks on Friday after the Chinese government implemented further cooling measures, metals in the complex rose +3.8 - 12% on weekly basis.
Copper remains our preferred investment. Although imports to China dropped -21% mom to 292K metric tons in January, it's up +25% from the same period last year. SHFE price for copper futures trades at a premium to that in the LME, attracting demand for the latter.
The biggest disappointments came from gasoline and distillate. Gasoline inventory rose +2.63 mmb to 230.4 mmb, around +13 mmb above the level last year. Although demand increased +1.8% to 8.766M bpd on weekly basis, it's still -2.7% below the same period last year. Distillate stockpile drew but was less than market expected. Demand improved slightly, rising +1% from a week ago to 3.696M bpd due to cold weather in the Northern hemisphere, but remained weak compared with 4.115M bpd recorded in 2009.
Major energy agencies (US Energy Department, EIA and OPEC) revised their forecasts of global oil demand. On average, oil demand is expected to reach 85.6M bpd in 2010, up +1.4% from 2009. The forecast was also slightly higher than January's projection of 85.5M bpd, hinged on stronger expectations on economic growth. Similar to previous estimates, non-OECD countries, especially China will be responsible for the majority of demand growth.
According to the US Energy Department, the world oil market should tighten in 2010 and 2011. 'Continuation of the production targets set by the OPEC, as well as lower overall growth in non-OPEC supply over the 2010-2011 forecast period, would also contribute to a firming of crude oil prices to above $80 per barrel this summer. However, the combination of high commercial inventories among members of the OECD and ample OPEC surplus production capacity should help dampen the likelihood of any large upward swings in prices'.
OPEC revised upward its global GDP growth forecasts to +3.4% in 2010, after contracting by -0.9% in 2009, due to strength in developing Asia, with China seen growing by +9.1% in 2010, while India is forecast to grow by +7.0% in 2010. However, OECD should only expand by a mere +1.7%. Upgrade in economic outlook translated into slightly higher demand outlook with the slower pace of recovery in US demand being the major downside risk.
In Europe, EU leaders pledged to provide support to Greece in overcoming the debt crisis. However, no concrete plans were mentioned. Risky assets such as equities and commodities rallied strongly earlier in the week before the meeting was held but gains were capped after the EU statement proved to be a non-event. The euro plummeted against the dollar and the Japanese as it's widely expected that EU's assistance to Greece and/or other countries with sovereign risks would result in weakness in the currency.
Towards the end of the week, the People's Bank of China announced to raise the required reserve ratio for commercial banks by +50bps. This was the second time in 2010 that the central bank raise reserve ratio as a means to slow the pace of lending. Investors were upset by the measure as it might slow down growth and demand for commodities.
Despite the strength against the euro, the dollar index slid -0.16%, the first time in 4 weeks, to close at 80.31. Reuters/Jefferies CRB Index +3.6% to settle at 267.92.
Crude Oil
The front-month contract for WTI crude dropped for the first time in 5 days on Friday as China's central bank increased required reserve ratio in commercial banks, signaling further cooling of lending. The benchmark contract plummeted to as low as 72.66 after the release of US inventory data. However, price rebounded shortly and settled at 74.13, dropping -1.5% for the day but rising +4.2% for the week.
Crude stockpile rose +2.42 mmb to 331.4 mmb in the week ended February 5. The higher-than-expected increase was driven by low refinery runs which, although rebounded to 79.11% last week, remained at historical low level.
Precious Metals
Gold price pared gains Friday amid broad-based decline in the commodity sector as well as selloff in the euro. The benchmark contract for the yellow metal settled at 1090 after plunging to as low as 1078.1. On weekly basis, the contract gained +3.5%.
Despite gold's strong correlation with EURUSD, the yellow metal managed to rise when the euro dropped against the dollar. We believe it's the heightened volatility in EURUSD that has driven investors to gold.
Although gold has the risk of weakening further in the near-term amid USD's strength, we see dips as buying opportunities as central banks in emerging markets still have strong interests in accumulating gold. Also, strength in USD should diminish as soon as the Fed hikes interest rate, probably by late-2010.
Silver gained +4.2% to close at 15.45 last week. However, since the beginning of the correction in mid-January, silver has dived -17% in month while gold has dropped -5%. As driven by worries about slowdown in global economic recovery, silver has underperformed gold so far this year. However, the sharp fall has brought the gold/silver ratio 19% higher than 5-year average, suggesting upside risk for silver against gold.
PGMs rose last week with platinum rising +2.4% and palladium +5%, after declining for 3 consecutive weeks. We are optimistic on PGMs' outlook in this year and view previous corrections as profit-taking after the rigorous rallies in mid-December to mid-January. Both robust investment demand and tightness in the market are supportive for prices.
Base Metals
Base metals rebounded strongly as risk appetite improved. Despite pullbacks on Friday after the Chinese government implemented further cooling measures, metals in the complex rose +3.8 - 12% on weekly basis.
Copper remains our preferred investment. Although imports to China dropped -21% mom to 292K metric tons in January, it's up +25% from the same period last year. SHFE price for copper futures trades at a premium to that in the LME, attracting demand for the latter.
The biggest disappointments came from gasoline and distillate. Gasoline inventory rose +2.63 mmb to 230.4 mmb, around +13 mmb above the level last year. Although demand increased +1.8% to 8.766M bpd on weekly basis, it's still -2.7% below the same period last year. Distillate stockpile drew but was less than market expected. Demand improved slightly, rising +1% from a week ago to 3.696M bpd due to cold weather in the Northern hemisphere, but remained weak compared with 4.115M bpd recorded in 2009.
Major energy agencies (US Energy Department, EIA and OPEC) revised their forecasts of global oil demand. On average, oil demand is expected to reach 85.6M bpd in 2010, up +1.4% from 2009. The forecast was also slightly higher than January's projection of 85.5M bpd, hinged on stronger expectations on economic growth. Similar to previous estimates, non-OECD countries, especially China will be responsible for the majority of demand growth.
According to the US Energy Department, the world oil market should tighten in 2010 and 2011. 'Continuation of the production targets set by the OPEC, as well as lower overall growth in non-OPEC supply over the 2010-2011 forecast period, would also contribute to a firming of crude oil prices to above $80 per barrel this summer. However, the combination of high commercial inventories among members of the OECD and ample OPEC surplus production capacity should help dampen the likelihood of any large upward swings in prices'.
OPEC revised upward its global GDP growth forecasts to +3.4% in 2010, after contracting by -0.9% in 2009, due to strength in developing Asia, with China seen growing by +9.1% in 2010, while India is forecast to grow by +7.0% in 2010. However, OECD should only expand by a mere +1.7%. Upgrade in economic outlook translated into slightly higher demand outlook with the slower pace of recovery in US demand being the major downside risk.
