Weekly Fundamental Outlook for Energies and Metals - Crude Oil Retreated Despite Strong Macro Data- Investors Turned To Fundamentals Again

USD turned around Friday after release of much less-than-expected decline in non-farm payrolls and decrease in unemployment in July. According to the Labor Department, non-farm positions dropped -247k in July, compared with consensus of -345k, following an upwardly revised -443K in the prior month. More surprisingly, unemployment rate slipped to 9.4% from 9.5%.

Although USD had declined when macro-economic data came out more strongly than expected in recent months, the opposite happened Friday. The dollar index surged to as high as 79.07 before closing at 78.06, +1.2%. Over the week, the gauge added +0.8%.

The phenomenon suggested the market has begun to factor in faster rate hike or at least the Fed will deliver a less dovish tone on monetary policy at the FOMC meeting next week.

Commodities pared gains with the energy complex leading the decline Friday, although stocks surged in tandem with USD. This suggests that the negative correlation between USD and commodities is probably more pronounced than the positive correlation between stock markets and commodities. Reuters/Jefferies CRB Index slid -0.2% Friday but gained +2.7% last week.

Crude Oil

Crude oil price retreated after surging to 5-week high at 72.84 as USD strengthened Friday. The benchmark contract for the black gold declined -1.4% to 70.93. On weekly basis, the gauge gained +2.1%. Others in the energy complex also plummeted Friday with gasoline sliding -2.6% to 2.01, the lowest settlement since July 30 and heating oil losing -1.3% to 1.91.

Since 4Q08, we have seen increasing positive correlation between oil price and S&P 500 Index. The correlation has soared to almost 0.8 in May. While most of us have begun to take this for granted, Friday's divergent performance in stocks and oil showed that the positive correlation is not always true.

The chart below showed that the correlation between returns on S&P 500 and WTI crude was not significant in 2007 and early 2008 but turned prominently negative in mid-2008. The inverse correlation indeed makes sense. Energy stocks make up less than 20% of S&P 500 Index. Rally in oil price can only boost up the index slightly. However, the rest of the constituents in the index may have been seriously hurt by rise in oil price, especially the industrial, airline, etc.

We believe the in-tandem movement between oil and stocks was driven by robust confidence in macro-economic outlook. Investors saw improvements in economic data and believe between outlook would support fundamentals in energy market.

Further gauge on the correlation is required. If the divergence persists, this may indicate oil or commodity investors have shifted from trading based on macro-economic outlook to trading based on energy-specific fundamentals which remains weak and does not support recent relatively-high oil price.

The inventory report by US Energy Department sent us a mixed picture in the energy market. Crude oil inventory rose for the second week due to decline in refinery runs. We believe crude build will continue in coming weeks as weak demand in oil products and the start of maintenance season will keep refinery low.

Surprise was seen in reduction in distillate inventory, the first decline since April. However, the draw was driven by decrease in production and imports, rather than increase in demand. We believe a more sustainable inventory draw is needed to be accompanied by impressive rise in demand which we anticipate will occur in 3Q/4Q 09.

Spread between WTI and Brent crude oil has turned negative again since early July. We believe the situation should persist for sometimes time as Cushing stock, the delivery point of WTI crude, has been building rapidly. However, the situation may be soothed as production in North Sea resumes in September. This will alleviate the tightness in supply of Brent crude.






Natural Gas

Despite better-than-expected employment data, natural gas followed the broad-based decline in the energy complex and slid -1.8% to 3.67 Friday. Over the week, the gauge climbed +0.5% higher.

Although gas price rallied earlier last week, huge gain in storage damped investors' hope that gas fundamentals would improve with the help of macroeconomic outlook. The US Energy Department reported that gas supplies rose 66 bcf to 3089 bcf in the week ended July 31. This was higher than market expectation of a +61 bcf increase and has brought the increase +19% higher than 5-year average.

Usually, good job data can boost gas price but that's not case this time. In June, the US Labor Department reported that factory payroll dropped -52K, after a -131K decline a month ago. This should have been good news for gas price as industrial users contribute about 30% of gas demand in the US.

However, gas price was not helped by the job data. This is another indication that investors have now turned to trade based on industry fundamentals rather than macro outlook.

The number of gas rigs increased for the 3rd consecutive week to 681 in the week ended August 7 from 677 in the prior week. In total, oil and gas rigs in the US rose to 966 units, the highest level since April 17. As we mentioned last week, the situation that the gas market facing is a vicious cycle: reduction in supply will boost price to a level that trigger production which in turn drag down price again. We believe this knot can only be untied by recovery in demand.





Precious Metals

Gold was the only one the precious metal complex that retreated Friday. The yellow metal dropped -0.4% to 959.5 as USD rebounded. Over the week, the benchmark contract added +0.4%. Gold price has been consolidating within the range of 865 and 1007.7 for almost a year. In recent months, the trading range has narrowed to 900 and 990. We believe the main reasons for the dull situation are capitals outflows for gold ETFs and futures, as well as the rather consolidative mode in USD.

Both ECB and BOE left policy rates unchanged at 1% and 0.5%, respectively. This is positive for gold as the yellow metal usually performs well in low-rate environment. Moreover, the BOE announced to extend the asset purchase program to 175B pound from 125B pound as economic condition in the UK is worse than anticipated. Extension of QE measures increases the risk of inflation and will theoretically drive demand for gold.

Moreover, signatory of new 5-year Central Bank Gold Agreement (CBGA III) set limits on central bank gold sales. The new agreement reduces the limit of maximum gold sales to 400 metric tons a year, from 500 metric tons CBGA II. Although IMF did not sign the agreement, it's believed that the lender's sales of gold will also follow the rules inside. This should remove the overhang of IMF's gold sales.

Silver price gained +0.2% to close at 14.67 Friday. On weekly basis, the contract jumped +5.2%, outperforming gold. We expect the gold/silver to decline further as industrial demand for silver should hold up well as economy recovers.

PGMs rallied on better-than-expected US vehicle sales. Platinum price settled at 1268.5, gaining +0.4% Friday and +4.5% over the week. Palladium rose +2.9% Friday and +5.6% over the week to close at 279.05. US vehicle sales increased to an annual rate of 11.24M units in July from 9.7M units in the prior month. The reading also came in higher than consensus of 10.2M unit.



Base Metals

Base metals pulled back on early Friday after the China government announced decline in loan growth. People's Bank of China said that the government will fine-tune the monetary policy and the surge in loan in the first half was due to the government's stimulus. The pace of growth will not be as rapid in the second half. Traders took profits as they anticipated fewer projects rolling out in China means reduction in demand for base metals.
However, better-than-expected US non-farm payrolls boosted price again. Base metal complex gained Friday with LME copper, lead and zinc rising +2.1%, +2.4% and +2.7% respectively. Over the week, copper for 3-month delivery jumped +7.5% to 6150.

Although the base metal complex has become the best performing sector so far in 2009, we remain doubtful whether the rally is sustainable. The Chinese Customs will report preliminary trade data for July on August 11 and we believe a drop in net import should trigger selloff in copper and other base metal prices.

Crude Oil Weekly Technical Outlook Nymex Crude Oil (CL) Crude oil's correction from 68.99 was contained above 62.44 cluster support (61.8% retracement of 58.32 to 68.99 at 62.39) as expected. Subsequent strong rally and break of 68.99 high indicates that rise from 58.32 has resumed and should now be targeting key cluster level at 73.38 with 100% projection of 58.32 to 68.99 from 62.7 at 73.36. While some retreat might be seen, break of 62.70 support is needed to indicate that rise from 58.32 has completed. Otherwise, short term outlook will remain bullish. In the bigger picture, whole medium term rebound from 33.2 is likely still in progress as crude oil is still trading well inside rising channel from there. Current rise from 58.32 should be resuming such rebound and will likely make another high above 73.38, probably to 38.2% retracement of 147.27 to 33.2 at 76.77. But strong resistance will likely be seen as crude oil enters into 76.77/90.24 fibo resistance zone. Hence, we'd look for sign of reversal and loss of momentum as crude oil as the current rise continues. on the downside, break of 62.70 support will argue that crude oil has possibly topped out earlier than we expect and break of 58.32 support will now be an important signal that crude oil has already topped out. 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 there 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.

Gold Gains for Second Day in Asia as Oil Climbs, Dollar Drops

July 20 -- Gold gained for a second day in Asia as higher oil prices and a weaker dollar prompted investors to seek the precious metal as a store of value.

Oil climbed for a fourth day as equities rose and a weaker dollar encouraged investment in commodities. The dollar traded near a two-week low versus the euro on speculation European and U.S. reports this week will show the global recession is easing, sapping demand for the greenback as a refuge.

“News that U.S. housing starts increased in June to the highest level in seven months encouraged moves of funds out of the bond market and U.S. dollar and into equities, which we believe buoyed gold,” HSBC Securities analyst James Steel said in a note. “Higher oil prices are also positive for gold.”

Gold for immediate delivery gained 0.3 percent to $940.10 an ounce at 10:04 a.m. in Singapore.

Eighteen of 32 traders, investors and analysts surveyed by Bloomberg News, or 56 percent, said bullion would gain this week as investors seek a hedge against inflation. Eleven forecast lower prices and three were neutral.

The MSCI Asia Pacific Ex Japan Index gained for a fifth day today on U.S. housing starts data. A Conference Board index of U.S. leading economic indicators due today probably increased 0.5 percent in June, after a 1.2 percent increase in May, according to a Bloomberg News survey of economists.

Among other precious metals for immediate delivery, silver gained 0.7 percent to $13.525 an ounce, platinum was little changed at $1,177.75 an ounce and palladium added 0.2 percent to $248.25 an ounce.

Energy and Precious Metals Technical Analysis

Energy and Precious Metals Technical Analysis

Analysis - Commodity Technical Analysis

Crude oil fell, headed for its biggest weekly decline since January on concern a prolonged global recession will sap demand for energy. Oil has dropped 10 percent this week on speculation fuel consumption in the U.S., the biggest energy-using nation, will remain subdued. Gasoline stockpiles increased over the Independence Day weekend, the peak of the summer driving season, a July 8 report showed. Yesterday, futures touched $59.25 a barrel, the lowest intraday price since the start of the year.
Trading Tactics
Sell Crude oil on signs of a double top formation.
The buying point is at 65.50; previous resistance is the take profit at 73.40; Fibonacci 38.2% is the stop loss at 58.10
The selling point is at 59.77; Fibonacci 50% is the take profit at 53.50; Fibonacci 23.6% is the stop loss at 64.30
Technical: Crude oil fails to break the previous resistance and form a double top formation. A move back lower could set up a test of 53.50

Oil N' Gold Focus Reports

Oil N' Gold Focus Reports


ONG Focus - Insights
Written by Oil N' Gold Thu Jul 09 09 01:01 ET
Commodity prices continued to sink deeper Wednesday amid renewed concerns about global economic recession. The energy complex got the biggest hit with crude oil plunging -4.4% to close at 60.14 while gasoline and heating oil diving -5.7% and -3.9% to 1.63 and 1.54, respectively. Although the black gold's selloff stabilizes and recovers slightly after hitting 60.01 (currently trading at 60.8), we find the level can just provide temporary support and further decline after consolidation is likely.
The inventory report by the US Energy Department was generally bearish. Although -2.9 mmb decline in crude inventory came in higher than consensus and API's estimates, Cushing stock rose for the second consecutive week and by an impressive +1.6 mmb. We worry that, as the peak driving season ends and refinery facilities enter the maintenance season, crude stockpile will set to increase in coming weeks.
Gasoline inventory came in higher-than-expected as high gasoline price continued to motivate refiners but discourage consumers. 4-week average gasoline demand was down -1.4% yoy. We believe the high margin is unsustainable and recommend selling short on every rebound in gasoline crack.
Condition for distillate was disastrous. Its inventory level rose +3.74 mmb to 158.74 mmb, the highest since 1985. At the same time, its demand reached the lowest level since mid-2003 with 4-week average falling -21.6% yoy. Same as gasoline, we are bearish on distillate crack.
Natural gas is expected to have gained +85 bcf to 2806 bcf in storage in the week ended July 3. Gas price plummeted -2.2% to 3.35 Wednesday as driven by broad-based decline in energy and commodity prices. Its fundamentals remain weak as industrial consumption is expected to fall -8.2% while total demand will decline -2.3% to 62.1 bcf a day in 2009.
OPEC revised down its forecasts for world oil demand by -5.7M bpd to 87.9M bpd for year 2013 as world economic outlook remains uncertain and recovery from global recession will only take place gradually, thus demand for crude should only 'rise slowing over the medium term and return to 2008 level by around 2013'. At the same time, the cartel's production will be reduced to 31M bpd by that time, compared with 31.2M bpd in 2008 as increase in Canadian oil sands and biofuels, together with stable non-OPEC crude and NGLs, will take up the balance.
While the market has expected discussions about 'exit strategies' at the G-8 summit, world leaders concluded that it's too early to 'exit' as world economy remains weak. Rather, more stimulus measures may be needed. Although IMF revised upward its economic forecasts in 2010, its trimmed inflation outlook as well as underlying comments still pointed to the fragility of world economy which was negative for risky assets including commodities.IMF forecasts the world economy will contract -1.4% in 2009, down from -1.3% projected in April. However, in 2010, the lender expected it will grow by +2.5%, compared with +1.9% in April's estimate, as led by emerging countries including China while Europe will be lagging both the US and Japan. For advanced economies alone, GDP will contract -3.8% in 2009 before expanding +0.6% (April's projection: +0%) in 2010. For the US, the world's largest oil consumer, GDP is expected to contract -2.6% this year and then rise +0.8% in 2010.
Concerning inflation, the IMF forecast global CPI will increase +0.1% in 2009 and then rise to +0.9% in 2010. In its previous Outlook in April, it had forecast increases of +0.3% and +0.6% respectively. The Fund said that although there's small risk for sustained deflation, the risk of inflation remains subdued through 2010 due to the significant output gap.
Diminished inflation outlook, strength in dollar and weakness in commodity prices continued to drive precious metals lower. The benchmark contract for gold slipped to as low as 904.8 Wednesday before finishing the day at 909.3 (-2.1%). Others in the precious metal complex also got hammered with silver, platinum and palladium losing -2.8%, -3% and -2.7% to 12.85, 1101.8 and 234.1, respectively. While we see buying interest above 900, near-term outlook for gold remain skewed to the downside. USD rallied against major currencies except for Japanese yen as risk-averse investors sought safe investments. Against the euro, the greenback rose to 1.383 before retreating to 1.394. Against the pound, USD surged to 1-month high at 1.5984 before pulling back.