The 2 most important events happened last week were PBOC's issuance of bills at a higher rate as well as disappointing US employment report. Commodity prices advanced earlier in the week but pared some gains after the 'negative' news. The Reuters/Jefferies CRB Commodity Index soared +2.6% to 290.77.
PBOC (China's central bank) offered RMB 60B worth of 3-month bills at 1.3684% in its weekly open-market operation Thursday. This can be interpreted as a form of 'rate hike' as it had been keeping the yield at 1.3280% since August 2009. The move indicates that China would continue to guide market interest rates higher and absorb liquidity from the market through issuance of central bank notes. Earlier this week, the PBOC declared that it would strike a balance between providing liquidity support to maintain relatively fast growth and controlling hyper-inflation. Therefore, managing an appropriate pace of credit growth is the central bank's focus this year. That said, the central bank reiterated that the monetary policy will continue to be 'appropriately loose' so that the market should not be overly worried about tightening.
On Friday, the Labor Department reported that the number of payrolls dropped -85K, compared with market expectation of no change, in December. Unemployment rate stayed at 10%. The report had mixed impact on commodities (esp. energy and base metals). On one hand, the weaker-than-expected report suggested economic recovery was not as smooth and fast as previously anticipate, This was negative for commodity demand, hence, for price. On the other hand, reduced speculations for an early rate as a result decline in payrolls triggered selloff in USD. This was positive for commodity prices.
Crude Oil
Despite briefly breaking below 82 after disappointing non-farm payrolls data, crude oil managed to recover and close at 82.75, up +0.1% Friday. The benchmark contract surged +4.3% last week.
Abnormally cold weather in the Northern hemisphere boosted oil demand and drove energy prices higher in the beginning of 2010. Not only WTI crude oil price breached 2009-high at 82, gasoline and heating prices also recorded prominent gains. On the macro front, economic data continued to show recovery which in turns suggesting demand improvement. Although things look nice apparently, supplies remain ample and demand is still weak. We worry that oil prices will face deep correction once weather returns to normal.
After decline for 4 weeks in December, crude oil inventory rose +1.3 mmb to 327.3 mmb in the week ended January 1. For oil products, gasoline stockpile increased again, up +3.74 mmb, after dropping modestly in the previous 2 weeks while decline in distillate stockpile decelerated to only -0.23 mmb. Worse still, demands were much weaker than December and stayed at historic lows.
The dramatic decline in crude oil price from the peak at 147.27 in July 08 found a bottom at 33.2 in January 09. Since then, crude oil has rallied almost every month. On annual basis, WTI crude gained +78%. As we mentioned in previous articles, pure fundamentals did not justify the massive gain and a price level above 80. A large extent o f the rally have priced in expectation of future demand recovery.
The crisis in 2008-09 was termed as the worst recession since World War II. Undoubtedly, it must have very significant impacts on different markets, including commodities. As the recession and recovery have dominated movements of various assets, correlations between markets have reached exceptionally in high in 2009. In particular, commodities were moving in tandem with stocks and inversely with USD. However, we believe these patterns will fade in 2010 as commodity prices will be influenced more by industry-specific factors (such as supply demand, inventory) and less by macroeconomic outlook.
After declining for 2 years, oil demand should increase in 2010. According to the US Energy Department (EIA), world oil demand should increase +1.3% to 85.219M bpd in 2010. In fact, EIA's demand forecast has risen from the bottom of 84.39 M bpd in May, indicating its increasing bullishness on the market. Other agencies also expect demand to increase in 2010. Taking an average of forecasts of EIA, IEA and the OPEC, oil demand will increase to 85.5M bpd in 2010 from 84.44 a year ago.
On the supply side, non-OPEC production is expected to increase slightly, by +0.3M bpd, to 51.12M bpd in 2010. Deceleration in the pace of increase in non-OPEC production is due to lower growth in the US and FSU. Without quota constraints, OPEC NGL production should rise further. Consensus forecasts it to increase to 5.49M bpd in 2010 from 4.86M bpd in the prior year. The forecasts suggest that 'call on OPEC will increase slightly to 28.94 M bpd from 8.73M bpd. According to OPEC's December report, total OPEC production reached 29.077M bpd in November, suggesting the cartel will need to increase quota compliance while fell sharply to 60% in November, 09 from 80% in 1Q09.
Oil's strength in 2009 was largely driven by anticipation better demand outlook in 2010. It's true that demand should improve this year. However, seeing the whole demand/supply picture, OPEC's production remains a critical factor in determining price. According to OPEC officials, the optimal compliance level is 75-80%. Should this rate be accomplished, the market would definitely be tightened and oil price should go higher. However, spare capacity remains a concern. EIA forecast spare capacity in OPEC will reach 4.24M bpd in 2010. It is highly likely that OPEC members will be tempted to ignore quotas and increase production as oil price rises.
Natural Gas
Extremely cold weather also sent gas price to as high as 6.108 Thursday. However, less-than-expected decline in gas inventory and unexpected decline in US payrolls snapped gains and gas price plummeted to 5.749 at close. The benchmark contract rose +3.2% on weekly basis.
Stockpiles of natural gas dropped -153 bcf to 3123 bcf in the week ended January 1. Analysts hd anticipated inventory to fall more than -200 bcf owing to cold weather.
According to the US Energy Department, gas production probably rose +3.7% in 2009 due to minimal hurricane disruptions and significant growth in production from onshore shale basins. Similar trend is expected to continue in coming few years. IEA warned, in its annual energy report, of an 'acute glut' due to weaker than expected demand and plentiful US unconventional supply.
LNG supply is increasing as it is one of the cleanest types of fuels and can be transported in vessels. EIA expects that US LNG imports will increase to 1.7 bcf per day in 2010 with the expected completion of additional global LNG supply projects.
Precious Metals
Despite initial retreat to 1119.5, gold price rebounded strongly as weak employment report reduced speculations for an early Fed rate hike. The benchmark contract closed at 1138.9, up +0.1% and +3.8% on daily and weekly basis. While an earlier-than-expected tightening of US monetary policy is an important downside risk for the yellow metal, we do not expect things will materialize in the first half of the year. That is, gold price should be able to go higher in the medium-term.
While fundamentals will be the major drivers for most commodities this year, gold price will still be, to a large extent, driven by investment demands. In 2009, bullion attracted strong investor interest as USD slumped, expectation for inflation increased and central banks built up their gold reserves.
Official sector has been net gold seller over the past 2 decades. However, things have changed in 2009 as several central banks (mostly from emerging markets) announced gold purchases while sales by European central banks were minimal. It's possible that official sector will become net gold buyer In 2010.
China announced it had increased its gold reserve to 1054 metric tons in April 09 while Russia has been accumulating gold in the past 3 year. The Russian central bank purchased 88 metric tons of gold In the first 10 months of 2009 and news reported it would buy 30 metric tons in December 09.
November was the best month for the yellow metal in 2009 as it set fresh nominal records for 15 out of 21 trading days during the month and recorded the largest percentage increase since September 1999. In November, the IMF announced it had sold 200 metric tons of gold to the Reserve Bank of India. This was the first time since 1995 that India bought gold and the total purchase represented half of IMF's total planned sales of 403.3 metric tons. Shortly after this, the IMF said that the central bank of Mauritius and the central bank of Sri Lanka had bought 2 metric tons and 10 metric tons of the rest of gold, respectively. Buying from central banks in emerging countries indicated a growing appetite for bullion holdings and spurred speculations for further central bank demand.
Silver, platinum and palladium should be less affected by interest rate movement given their applications in industrial activities. Particularly for PGMs, improvements in auto sales in the US, Japan and China are supportive for prices as auto-catalysts take up 60% of platinum and palladium demands. Last week, PGMs glittered with platinum surging +6.8% to 1570.6 and palladium gaining +4% to 425.2.
Base Metals
Earlier in the week, most metals in the complex reached highest levels in more than 1 year amid strong manufacturing data in China and the US. Moreover, severe weather condition weighed on prices as production may be disrupted by heavy snowfall. However, prices tumbled amid speculations for monetary tightening in China.
As in 2009, outlook for base metals is divergent in 2010. We believe copper will perform the best while aluminum the worst. Copper has a tighter supply picture as ore grades are falling and there's lack of investment in mining. For aluminum, inventory remains abundant and re-opening of smelters will further boost support. China may return to a net exporter of aluminum in 2010 after being a net importer in 2009 for first time in 7 years.
GOLD REPORT:
Gold's choppy rebound from 1075.2 continued last week and extended further to 1141. Further rise is still expected as long as 1119.5 minor support holds and Gold could now be targeting 61.8% retracement of 1227.5 to 1075.2 at 1169.3. On the downside, howeve,r break of 1119.5 will suggest that such recovery has completed already and will flip intraday bias back to the downside for retesting 1075.2 support instead.
In the bigger picture, rise from 681 is expected to develop into a set of five wave sequence with first wave completed at 1007.7, second wave triangle consolidation completed at 931.3. Rise from 931.3 is treated as the third wave and has possibly completed at 1227.5 after missing 100% projection of 681 to 1007.7 from 931.3 at 1258. Deeper pull back could now be seen to 1026.9/1072 support zone, or even further to retest 1000 psychological level. But downside should be contained well above 931.3 support and bring up trend resumption to another high above 1227.5.
In the long term picture, rise form 681 is treated as resumption of the long term up trend from 1999 low of 253 after interim consolidation from 1033.9 has completed in form of an expanding triangle. Next long term target is 100% projection of 253 to 1033.9 from 681 at 1460 level. We'll hold on to the bullish view as long as 931.3 structural support holds.
CRUDE OIL REPORT:
Crude oil finally broke 82.0 resistance to resume the medium term rally and stayed firm above this level. While some sideway trading might be seen in initially this week, outlook will remain bullish as long as 80.79 support holds. Recent rise from 68.59 is expected to resume sooner rather than later towards upper trend line resistance at 87/88 level. On the downside, break of 80.79 will argue that a short term top might be formed with bearish divergence condition in 4 hours MACD and deeper pull back could be seen before another rise.
In the bigger picture, the break of 82.0 resistance confirms that whole medium term rise from 33.2 has resumed. Nevertheless, there is no change in the view that it's a correction to fall from 147.27. Hence, we'd continue to look for reversal signal as crude oil approaches 50% retracement of 147.27 to 33.2 at 90.24, which is close to 90 psychological level. However, break of 68.59 support is still needed to confirm that rise from 33.2 has completed. Otherwise, outlook will be neutral at worst even in case of deep pull back.
In the long term picture, there is no change in the view that fall from 147.27 is part of the correction to the five wave sequence from 98 low of 10.65. While the rebound from 33.2 is strong and might continue, there is no solid evidence that suggest fall 147.27 is completed and we're still preferring the case that rebound from 33.2 is merely a corrective rise only. Having said that, strong resistance should be seen between 76.77/90.24 fibo resistance zone and bring reversal for another low below 33.2 before completing the whole correction from 147.27.
SILVER REPORT:
Silver's rise from 16.765 extended to as high as 18.525 last week and is now pressing 61.8% retracement of 19.50 to 16.78 at 18.46. Further rise is still in favor initially this week as long as 18.055 minor support holds. Sustained trading above 18.46 fibo resistance will indicate that whole fall from 19.50 has completed at 16.765 after drawing support from 38.2% retracement of 12.435 to 19.50 at 16.80. In such case, further rally should be seen to retest 19.50 high first. On the downside, however, failure at the current level, followed by break of 18.055 minor support will suggest that rebound from 16.765 has completed and will flip intraday bias back to the downside for retesting this support first.
In the bigger picture, the stronger than expected rebound from 16.75 dampens the view that silver has topped out 19.50 and revives the possibility that rise from 12.435 is still in progress. Nevertheless, note that whole medium term rise from 8.4 is is treated as part of the long term, wide range, consolidation pattern that started at 21.44 back in Mar 08. Hence, even in case of another rise, upside is expected to be limited inside this 19.55/21.44 resistance zone and bring another medium term fall. On the downside, break of 16.765 support will revive the case that silver has topped out in medium term and will bring deeper decline towards lower medium term trend line at 14 level.
In the longer term picture, the up trend from 01 low of 4.01 topped out at 21.44 and subsequent price actions are treated as correction/consolidation to this up trend. Fall from 21.44 completed after drawing support form 8.5 key level. However, subsequent rally from 8.4 is not displaying a clear impulsive structure and hence, we'd prefer the case that it's just the second wave of the wide range consolidation pattern. Another medium term fall should still be seen for retesting 8.5 before completing the consolidation. Nevertheless, strong support is still expected at 5.45/8.5 support zone to conclude the consolidation.
PBOC (China's central bank) offered RMB 60B worth of 3-month bills at 1.3684% in its weekly open-market operation Thursday. This can be interpreted as a form of 'rate hike' as it had been keeping the yield at 1.3280% since August 2009. The move indicates that China would continue to guide market interest rates higher and absorb liquidity from the market through issuance of central bank notes. Earlier this week, the PBOC declared that it would strike a balance between providing liquidity support to maintain relatively fast growth and controlling hyper-inflation. Therefore, managing an appropriate pace of credit growth is the central bank's focus this year. That said, the central bank reiterated that the monetary policy will continue to be 'appropriately loose' so that the market should not be overly worried about tightening.
On Friday, the Labor Department reported that the number of payrolls dropped -85K, compared with market expectation of no change, in December. Unemployment rate stayed at 10%. The report had mixed impact on commodities (esp. energy and base metals). On one hand, the weaker-than-expected report suggested economic recovery was not as smooth and fast as previously anticipate, This was negative for commodity demand, hence, for price. On the other hand, reduced speculations for an early rate as a result decline in payrolls triggered selloff in USD. This was positive for commodity prices.
Crude Oil
Despite briefly breaking below 82 after disappointing non-farm payrolls data, crude oil managed to recover and close at 82.75, up +0.1% Friday. The benchmark contract surged +4.3% last week.
Abnormally cold weather in the Northern hemisphere boosted oil demand and drove energy prices higher in the beginning of 2010. Not only WTI crude oil price breached 2009-high at 82, gasoline and heating prices also recorded prominent gains. On the macro front, economic data continued to show recovery which in turns suggesting demand improvement. Although things look nice apparently, supplies remain ample and demand is still weak. We worry that oil prices will face deep correction once weather returns to normal.
After decline for 4 weeks in December, crude oil inventory rose +1.3 mmb to 327.3 mmb in the week ended January 1. For oil products, gasoline stockpile increased again, up +3.74 mmb, after dropping modestly in the previous 2 weeks while decline in distillate stockpile decelerated to only -0.23 mmb. Worse still, demands were much weaker than December and stayed at historic lows.
The dramatic decline in crude oil price from the peak at 147.27 in July 08 found a bottom at 33.2 in January 09. Since then, crude oil has rallied almost every month. On annual basis, WTI crude gained +78%. As we mentioned in previous articles, pure fundamentals did not justify the massive gain and a price level above 80. A large extent o f the rally have priced in expectation of future demand recovery.
The crisis in 2008-09 was termed as the worst recession since World War II. Undoubtedly, it must have very significant impacts on different markets, including commodities. As the recession and recovery have dominated movements of various assets, correlations between markets have reached exceptionally in high in 2009. In particular, commodities were moving in tandem with stocks and inversely with USD. However, we believe these patterns will fade in 2010 as commodity prices will be influenced more by industry-specific factors (such as supply demand, inventory) and less by macroeconomic outlook.
After declining for 2 years, oil demand should increase in 2010. According to the US Energy Department (EIA), world oil demand should increase +1.3% to 85.219M bpd in 2010. In fact, EIA's demand forecast has risen from the bottom of 84.39 M bpd in May, indicating its increasing bullishness on the market. Other agencies also expect demand to increase in 2010. Taking an average of forecasts of EIA, IEA and the OPEC, oil demand will increase to 85.5M bpd in 2010 from 84.44 a year ago.
On the supply side, non-OPEC production is expected to increase slightly, by +0.3M bpd, to 51.12M bpd in 2010. Deceleration in the pace of increase in non-OPEC production is due to lower growth in the US and FSU. Without quota constraints, OPEC NGL production should rise further. Consensus forecasts it to increase to 5.49M bpd in 2010 from 4.86M bpd in the prior year. The forecasts suggest that 'call on OPEC will increase slightly to 28.94 M bpd from 8.73M bpd. According to OPEC's December report, total OPEC production reached 29.077M bpd in November, suggesting the cartel will need to increase quota compliance while fell sharply to 60% in November, 09 from 80% in 1Q09.
Oil's strength in 2009 was largely driven by anticipation better demand outlook in 2010. It's true that demand should improve this year. However, seeing the whole demand/supply picture, OPEC's production remains a critical factor in determining price. According to OPEC officials, the optimal compliance level is 75-80%. Should this rate be accomplished, the market would definitely be tightened and oil price should go higher. However, spare capacity remains a concern. EIA forecast spare capacity in OPEC will reach 4.24M bpd in 2010. It is highly likely that OPEC members will be tempted to ignore quotas and increase production as oil price rises.
Natural Gas
Extremely cold weather also sent gas price to as high as 6.108 Thursday. However, less-than-expected decline in gas inventory and unexpected decline in US payrolls snapped gains and gas price plummeted to 5.749 at close. The benchmark contract rose +3.2% on weekly basis.
Stockpiles of natural gas dropped -153 bcf to 3123 bcf in the week ended January 1. Analysts hd anticipated inventory to fall more than -200 bcf owing to cold weather.
According to the US Energy Department, gas production probably rose +3.7% in 2009 due to minimal hurricane disruptions and significant growth in production from onshore shale basins. Similar trend is expected to continue in coming few years. IEA warned, in its annual energy report, of an 'acute glut' due to weaker than expected demand and plentiful US unconventional supply.
LNG supply is increasing as it is one of the cleanest types of fuels and can be transported in vessels. EIA expects that US LNG imports will increase to 1.7 bcf per day in 2010 with the expected completion of additional global LNG supply projects.
Precious Metals
Despite initial retreat to 1119.5, gold price rebounded strongly as weak employment report reduced speculations for an early Fed rate hike. The benchmark contract closed at 1138.9, up +0.1% and +3.8% on daily and weekly basis. While an earlier-than-expected tightening of US monetary policy is an important downside risk for the yellow metal, we do not expect things will materialize in the first half of the year. That is, gold price should be able to go higher in the medium-term.
While fundamentals will be the major drivers for most commodities this year, gold price will still be, to a large extent, driven by investment demands. In 2009, bullion attracted strong investor interest as USD slumped, expectation for inflation increased and central banks built up their gold reserves.
Official sector has been net gold seller over the past 2 decades. However, things have changed in 2009 as several central banks (mostly from emerging markets) announced gold purchases while sales by European central banks were minimal. It's possible that official sector will become net gold buyer In 2010.
China announced it had increased its gold reserve to 1054 metric tons in April 09 while Russia has been accumulating gold in the past 3 year. The Russian central bank purchased 88 metric tons of gold In the first 10 months of 2009 and news reported it would buy 30 metric tons in December 09.
November was the best month for the yellow metal in 2009 as it set fresh nominal records for 15 out of 21 trading days during the month and recorded the largest percentage increase since September 1999. In November, the IMF announced it had sold 200 metric tons of gold to the Reserve Bank of India. This was the first time since 1995 that India bought gold and the total purchase represented half of IMF's total planned sales of 403.3 metric tons. Shortly after this, the IMF said that the central bank of Mauritius and the central bank of Sri Lanka had bought 2 metric tons and 10 metric tons of the rest of gold, respectively. Buying from central banks in emerging countries indicated a growing appetite for bullion holdings and spurred speculations for further central bank demand.
Silver, platinum and palladium should be less affected by interest rate movement given their applications in industrial activities. Particularly for PGMs, improvements in auto sales in the US, Japan and China are supportive for prices as auto-catalysts take up 60% of platinum and palladium demands. Last week, PGMs glittered with platinum surging +6.8% to 1570.6 and palladium gaining +4% to 425.2.
Base Metals
Earlier in the week, most metals in the complex reached highest levels in more than 1 year amid strong manufacturing data in China and the US. Moreover, severe weather condition weighed on prices as production may be disrupted by heavy snowfall. However, prices tumbled amid speculations for monetary tightening in China.
As in 2009, outlook for base metals is divergent in 2010. We believe copper will perform the best while aluminum the worst. Copper has a tighter supply picture as ore grades are falling and there's lack of investment in mining. For aluminum, inventory remains abundant and re-opening of smelters will further boost support. China may return to a net exporter of aluminum in 2010 after being a net importer in 2009 for first time in 7 years.
GOLD REPORT:
Gold's choppy rebound from 1075.2 continued last week and extended further to 1141. Further rise is still expected as long as 1119.5 minor support holds and Gold could now be targeting 61.8% retracement of 1227.5 to 1075.2 at 1169.3. On the downside, howeve,r break of 1119.5 will suggest that such recovery has completed already and will flip intraday bias back to the downside for retesting 1075.2 support instead.
In the bigger picture, rise from 681 is expected to develop into a set of five wave sequence with first wave completed at 1007.7, second wave triangle consolidation completed at 931.3. Rise from 931.3 is treated as the third wave and has possibly completed at 1227.5 after missing 100% projection of 681 to 1007.7 from 931.3 at 1258. Deeper pull back could now be seen to 1026.9/1072 support zone, or even further to retest 1000 psychological level. But downside should be contained well above 931.3 support and bring up trend resumption to another high above 1227.5.
In the long term picture, rise form 681 is treated as resumption of the long term up trend from 1999 low of 253 after interim consolidation from 1033.9 has completed in form of an expanding triangle. Next long term target is 100% projection of 253 to 1033.9 from 681 at 1460 level. We'll hold on to the bullish view as long as 931.3 structural support holds.
CRUDE OIL REPORT:
Crude oil finally broke 82.0 resistance to resume the medium term rally and stayed firm above this level. While some sideway trading might be seen in initially this week, outlook will remain bullish as long as 80.79 support holds. Recent rise from 68.59 is expected to resume sooner rather than later towards upper trend line resistance at 87/88 level. On the downside, break of 80.79 will argue that a short term top might be formed with bearish divergence condition in 4 hours MACD and deeper pull back could be seen before another rise.
In the bigger picture, the break of 82.0 resistance confirms that whole medium term rise from 33.2 has resumed. Nevertheless, there is no change in the view that it's a correction to fall from 147.27. Hence, we'd continue to look for reversal signal as crude oil approaches 50% retracement of 147.27 to 33.2 at 90.24, which is close to 90 psychological level. However, break of 68.59 support is still needed to confirm that rise from 33.2 has completed. Otherwise, outlook will be neutral at worst even in case of deep pull back.
In the long term picture, there is no change in the view that fall from 147.27 is part of the correction to the five wave sequence from 98 low of 10.65. While the rebound from 33.2 is strong and might continue, there is no solid evidence that suggest fall 147.27 is completed and we're still preferring the case that rebound from 33.2 is merely a corrective rise only. Having said that, strong resistance should be seen between 76.77/90.24 fibo resistance zone and bring reversal for another low below 33.2 before completing the whole correction from 147.27.
SILVER REPORT:
Silver's rise from 16.765 extended to as high as 18.525 last week and is now pressing 61.8% retracement of 19.50 to 16.78 at 18.46. Further rise is still in favor initially this week as long as 18.055 minor support holds. Sustained trading above 18.46 fibo resistance will indicate that whole fall from 19.50 has completed at 16.765 after drawing support from 38.2% retracement of 12.435 to 19.50 at 16.80. In such case, further rally should be seen to retest 19.50 high first. On the downside, however, failure at the current level, followed by break of 18.055 minor support will suggest that rebound from 16.765 has completed and will flip intraday bias back to the downside for retesting this support first.
In the bigger picture, the stronger than expected rebound from 16.75 dampens the view that silver has topped out 19.50 and revives the possibility that rise from 12.435 is still in progress. Nevertheless, note that whole medium term rise from 8.4 is is treated as part of the long term, wide range, consolidation pattern that started at 21.44 back in Mar 08. Hence, even in case of another rise, upside is expected to be limited inside this 19.55/21.44 resistance zone and bring another medium term fall. On the downside, break of 16.765 support will revive the case that silver has topped out in medium term and will bring deeper decline towards lower medium term trend line at 14 level.
In the longer term picture, the up trend from 01 low of 4.01 topped out at 21.44 and subsequent price actions are treated as correction/consolidation to this up trend. Fall from 21.44 completed after drawing support form 8.5 key level. However, subsequent rally from 8.4 is not displaying a clear impulsive structure and hence, we'd prefer the case that it's just the second wave of the wide range consolidation pattern. Another medium term fall should still be seen for retesting 8.5 before completing the consolidation. Nevertheless, strong support is still expected at 5.45/8.5 support zone to conclude the consolidation.
