The FOMC will meet to discuss about monetary policy next week. We expect policymakers to reinforce that interest rates will be kept at extremely low level for an extended period of time. Concerning economic outlook, the Fed probably will deliver more optimistic message in this meeting.
Crude Oil
The energy complex fell across the board last Friday as led by tumble in gasoline price. The benchmark contract for crude oil slid -2.8% to settle as 69.4. On weekly basis, the gauge lost -5.2%, marking the first decline in 5 weeks.
Gasoline for July delivery dropped more than 5% to close at 1.9244, the lowest level since June 8, amid worries that extended price rally has restrained consumption. Earlier last week, the US Energy Department reported that gasoline stockpile rose for the first time in 8 weeks, by +3.39 mmb, to 205 mmb despite peak driving season.
Yes, we viewed last week's inventory build as negative for gasoline. However, we stay neutral on when it comes to trading as prefer to look at more data points. In fact, gasoline stockpiles continue to hold below 5-year average although rise in demand has deteriorated. A few months ago, we mentioned that gasoline demand would drop as indicated by the trend in initial jobless claims data. Recent improvements in initial jobless claims not only suggested recession is ending but might also signal downside risk in gasoline consumption is contained. By contrast, distillate inventory is a more serious overhang and we expect narrowing in distillate cracks due to high inventories and poor demands.
While it's now widely understood that non-OECD countries have become the major growth driver in world energy demand, many of us had not anticipated these countries have also overtaken the throne as being the major energy consumers. According to BP Statistical Review of World Energy, non-OECD economies represented 51.2% of global consumption in 2008, as driven by huge coal demand from China.
Although it's been years that non-OECD countries have taken up the majority of coal demand, industry data showed that oil demand has picked up rapidly with annual growth outpacing that of OECD countries since 1999.
For the week ahead, we believe crude oil price should continue to trade within narrow range around 70-75 with USD's movement and market sentiment as the major price drivers.
Natural Gas
While current price level has been unjustified by fundamentals, natty has gained support price short-covering as well as relative value trades between gas and oil. Traders probably anticipated the current oil-to-gas ratio to fall from current level of around 17.
Natural gas plunged for 2 straight days after the US Energy Department reported huge storage injection of 114 bcf, high-end of 95-115 bcf consensus range, to 2557 bcf in the week ended June 12 due to low demand and mild weather in both the East and West coasts. The figure indicated inventory rose +32% yoy and remained 22% above 5-year average. Settling at 4.032, the benchmark contract gained +4.5% over the week but remained -28% down year-to-date,
The number of rigs in the US rose for the first time in 30 weeks to 692. Recent increase in gas price probably motivated production.
Precious Metals
Settling at 936.2, the benchmark gold contract lost for the 3rd straight week on USD's strength and strong decline in imports to India. In coming few weeks, we believe the yellow metal will continue to take cue from the dollar's movement and risk of gold price is on the downside. Recent economic data have consistently improved and signaled recession is ending. While it's unlikely for the Fed to start monetary tightening anytime soon, investors' confidence has improved and the Fed funds futures have priced in a significant chance that rate hike will come as soon as late-2009. Any good news coming from the macroeconomic front will trigger sentiment further. Rate hike is theoretically positive for the dollar and hence negative for gold. In tandem with gold, the silver contract plunged -4.5% to close at 14.2 last week. Platinum price slipped -3.9% to 1209.5 last week, also pressured by USD's strength. Possibility for a rebound cannot be ruled out for the week ahead as driven by potential supply disruptions in South Africa. The National Union of Mineworkers (NUM) said declared a dispute over wages against Impala Platinum. The Union has demanded a 20% rise in wages. The 2 parties will meet on June 24 to resolve the issue, after which the case will be taken to the Commission for Conciliation, Mediation and Arbitration. Impala Platinum is the second largest platinum producer in the world. In 2008, the company had platinum output of 1.9M oz, around 32% of global supply.
Base Metals
LME copper for 3 months delivery slumped -4% (-6.5% from the 5381 peak) to 5030 last week as a result of weaker-than-expected US industrial production and widespread speculations that China's re-stocking phase has ended/halted. At current price level, we believe the market has not yet fully priced in the view that China's base metal purchases will we
aken in coming weeks. We believe we will have to see actual decline in imports data or rise in inventory levels in China before prices come under significant selling pressure.
Copper price in Shanghai Futures Exchange (SHFE) has recently traded at a discount to LME, signaling demand from mainland China has reduced and traders in China has been shipping out the metal to other Southeast Asian countries.
