Gold and oil prices recover a tad after falling on Friday. Gold edge higher after the sharp fall on Friday as the decline triggered physical buying interests. Currently trading around 79, the front-month WTI crude contract has reached the top end of recent trading range and we see little catalyst in the near-term to push price above it. The major problem in the oil market is still sluggish demand. In the US, while utilization rate has jumped dramatically, demand for oil products remains subdued. While gasoline demand has improved in recent weeks, probably driven by the driving season, distillate demand has failed to surprise. According to the EIA, the distillate demand plunged to the lowest level since December 2009 last week.
The IEA reported that China has passed the US as the world's biggest energy consumer in 2009. China consumed 2252M metric tons of oil equivalent in 2009 in the form of crude, coal, natural gas, nuclear power and renewable sources while the US used 2170M last year. While the Chinese government said that they are skeptical to the accuracy of the data, it's undeniable that demand from China has become crucial to the world energy demand/supply outlook. The market was thrilled last week by a press release on Xinhuanet reiterating that the Chinese government would stick to accommodative policies and more stimulus measures will be implemented. However, we expect these new measures will not come out at least until the 4th quarter. Therefore, economic/trade data unveiling slowdown in Chinese oil demand will likely be seen in coming months and these may weigh on price further.
Asian stocks surge on Monday as driven by strong Korean GDP growth and higher-than-expected Japanese exports. The MSCI Asia Pacific Index rose to a 1-month high while Japan's Nikkei 225 Stock Average added +1% and South Korea's KOSPI gained +4%.
South Korea's GDP expanded +1.5% q/q in 2Q10, compared with market expectations of milder growth of +1.3%, as driven by robust manufacturing activities (+5.1%) and agriculture, forestry & fishing which was flat from the prior quarter after contracting -4.9% in 1Q10. The construction sector, however, contracted -0.8% after gaining +1.9% in 1Q10 while the services sector slowed +0.2% from +1.6% in 1Q10. On the expenditure side, facilities investments surged +8.1% while exports of goods rose +7.1%.
There are important US economic data due this week. Apart from Friday's 2Q10 GDP report, investors will pay attention to the June new home sales report, durable goods orders, as well as the Conference Board's consumer sentiment index. For central bank meetings, the RBNZ will likely raise its OCR by +25 bps to 3% on Thursday.
Commitments of Traders
Speculators remained bullish towards the energy complex, with natural gas as an exception, last week. Net length in crude oil, heating oil and gasoline rose for a second straight week. Oil returns have been helped by strong corporate earnings results and strength in US stock markets. Net shorts in natural gas increased 13 contracts despite increase in price. The market was cautious about gas storage and rig counts. US gas price for the rest of the year will continue to be weighed down by huge production. Apart from demand concerns, the number of unconventional rigs had been increasing rapidly, suggesting that actual gas production is much bigger than what is suggested by the total number of rigs.
Net length in precious metals fell across the board. Net length in gold slumped -13% to 178.3K, the lowest level since March 2010. Long positions dropped -15.9K while short positions soared +10.7K during the week. Bears fearing deflationary pressure probably won over bulls who bet on renewed sovereign crisis woes. Net length in silver also dropped in tandem with price decline. Despite rise in prices, net length in platinum and palladium dipped after rising mildly in the prior week. Potential supply disruption in South Africa may help PGMs in the coming week.