Brent Crude Recovers as Iranian Sanctions Looom

By Roger Baettig | June 26 2012 8:08 AM

Commodities moved sideways in European session as there lacked breakthroughs in the Eurozone crisis. Brent crude, however, climbed higher as the EU sanctions on Iranian oil loomed. In the precious metal complex, gold to silver ratio rose to the highest level in 22 months. The ratio usually declines as the economy booms and rises during contraction. At current level, silver's value should have turned more appealing and more short covering is expected as its net length has dropped significantly in recent weeks.

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The front-month contract for Brent crude oil recovered above 91 in European session. While one of the reasons is bargain-hunting, concerns over supply shortage as the EU sanctions over Iranian oil begin on July 1 also triggered buying interests. However, the actual impacts may not be as huge as expected as a number of countries have been granted exemptions. China is a key importer of Iranian oil and it did not agree on the embargo. The country's crude imports from Iran plummeted in the first quarter. While the US interpreted it as a means to sanction Iran, we believe it was driven by price issue. Indeed, China's import recovered in May, offsetting the previous decline.

Since late February, gold price has dropped more than -10% while silver has plunged -25% during the period. Underperformance in silver price was expected as the market has turned risk averse amid fears of global economic slowdown. This is negative to industrial metal like silver. Gold to silver ratio has soared in recent months. At around 60, we believe silver price is increasing attractive.

On the dataflow, China's conference board leasing index climbed +1.1% m/m in May after a rise of +0.9% in the prior month. Germany's Gfk consumer sentiment unexpected rose to 5.8 in July from 5.7 a month ago. The market had anticipated a dip to 5.6. In the US, consumer confidence might have dropped -0.9 points to 64 in June while S&P/Case-Shiller composite-20 index might have contracted -2.05 y/y in April after a -2.6% drop in the prior month.