Although energy prices did not react vigorously shortly after the inventory report, price began to tumble ahead of FOMC announcement. WTI crude oil plunged to as low as 72.65 before closing at 73.67, down -1.4%. Oil products also showed similar pattern with heating oil sliding to 1.8958 for recovering to 1.9168 (-1.7%) and gasoline dropping to 1.9115 before settling to 1.9392 (-1.4%). The inventory report was neutral with huge builds in fuel stockpiles offset by decline in crude inventory.

Precious metals slumped across the board. The benchmark contract for gold slipped -1.3% to 1085.7 while contracts for silver platinum and palladium plummeted around -2.5% to 16.44, 1492.1 and 416.7 respectively.

The US Energy Department reported crude oil inventory dropped -3.89 mmb to 326.7 mmb in the week ended January 22. Cushing stocks also drew-0.69 mmb, the 5th consecutive weekly decline. We believe the main reason for the huge decline in crude stocks was the closure of the Houston Ship Channel, which serves the largest US petroleum port, shut for 2 days because of fog. It was reopened on January 21. Also, the oil-tanker spill in the Sabine Neches Waterway has led refiners to cut back production. We expect to see another draw next week as the oil spill is still impacting imports.

Both gasoline and distillate rose +1.99 mmb to 229.4 mmb and +0.36 mmb to 157.5 mmb respectively. Demand for gasoline edged slightly high on weekly basis but the level at 8.619M bpd remained below last year's level. Beware that last year's demand was very weak as it was in the midst of the worst of economic crisis. Distillate inventory built modestly compared with market exception or a draw. Imports surged +142%, on weekly basis, to 0.658M bpd, the highest level never seen since 2006. Demand dropped -2.6% to 3.725M bpd during the week. The level was still -12.5% below last year's level.

The Fed decided to keep the policy rate unchanged at 0-0.25% and reiterated to unwind some liquidity programs as promised. However, the overall tone sounded more bullish and comments from some members were more hawkish than expected. This strengthened the dollar against major currencies as speculations on earlier rate hike were rekindled. Crude oil and other commodities were pressured as investment demand diminished as USD rose.
In the FOMC statement, policymakers seemed to be more confidence about economic growth and said 'economic activity has continued to strengthen and that the deterioration in the labor market is abating'. The forecast on inflation remained largely unchanged that 'substantial resource slack [is] continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time'.

However, the Fed still concerned about employment condition. 'Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls'. Employment situation is close related to fuel demand. As shown in the chart below, the number of jobless claims is inversely related to motor gasoline consumption.

Commodities met further selling pressure as the China Banking Regulatory Commission told banks to strictly follow lending policies. The regulator reminded banks to 'reasonably control' lending growth. A local newspaper said Chinese banks may stop lending to local governments in order to control risk.

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