Crude Oil Approaches 80 ahead of Inventory Data

The impact of oil spill on oil prices has been modest. Winds calmed after days of storms and workers rushed to complete the cleanup operations before the hurricane season which begins June.

Gold price steadies after the broad-based decline yesterday. The chart below shows that gold-to-silver ratio surged to the highest level since mid-March, suggesting risk aversion has brought investors to the yellow metal.

The spreading of Greece's sovereign crisis to other parts of the Eurozone will cripple economic growth and thus demand for commodities. Therefore, commodities with heavy industrial uses such as oil, base metals and silver have been pressured. Industrial applications only make up around 10% of total gold demand and thus worries about slow demand growth do not affect gold price much, when compared with other commodities.

Recent moves by the government in China, the world's largest growth driver and one of the biggest commodity consumers, have great impacts on global market. The third hike in RRR, a disappointing April PMI and potential plunge in property market transaction are hurting market sentiment. With the government's tightening measures, economists forecast the country's property transaction volume will drop more than -50% from mid-April's level. This inevitably affects prices of base metals which are mainly used in constructions.

Having slid -7.6%, LME copper was the worst performer among the base metal complex. Although price recovers today as buying interests emerges at around 7000, the 3-month contract have plummeted -12.7% from recent high at 8043.75 (April 12). We think the selloff was overdone. China's tightening measures have somehow been expected. Moreover, the government's aim is to prevent property price bubble but not to crack the market down. We think the actual impact on construction should not be as negative as the market anticipates.