Crude oil price falls below 66 in European morning as USD recovers and stock markets weakens. Currently trading at 65.5, the benchmark contract for crude oil is vulnerable to further decline as investors worry about demand outlook, with distillate consumption the weakest link.

While all of us are familiar with the inverse correlation between gold and USD, the dollar is in fact negatively correlated with all commodities as they are denominated in USD. Although gold traditionally had the strongest relationship with USD, it's 'status' has been overtaken by crude oil in September. This probably suggests crude oil, rather than gold, has greater appeal to investors as they seek higher risk-higher yields. Although gold price has been treated as a financial product, rather than a commodity, weak physical demand and IMF gold sales (although we do not expect significant real impact to price) have posed downside risk to gold's rally especially when price has approached record high level.

In the weekly report, we mentioned that distillate demand has been very weak despite improvements in economic data. At the same time, given the huge distillate inventory, refiners will delay/ slow down distillate production although we are entering winter. It's true that distillate demand should remain weak in the near-term. But, how about in the long-term? Will distillate demand catch up with global economic recovery? Yes, we think so.

US imports are critical to distillate demand. In recent months, 'new orders' component in ISM survey surged to 55.3 in July and then 64.9 in August. This signaled potential turnaround in the inventory cycle. Should businesses in the US re-stock, there's potential for distillate demand to pick up again.

Gold price changes little in European morning. Currently trading at 992.5, the yellow metal may halt a 3-day decline last week. However, as gold price had been so strong (having surged for 5 consecutive weeks from mid-August to mid-September) in the past month, further weakness cannot be ruled out and price may hover below 1000 for some time before uptrend resumes.

Stock performance in Europe is mixed. While both UK's FTSE 100 Index and France's CAC 40 Index slide -0.1-0.2% in morning session, Germany's DAX Index edges slightly higher (+0.8%) after Merkel, German Chancellor, won enough votes to form the next government.

In Asia, the MSCI Asia Pacific Index lost -1.6% with Japan's Nikkei 225 Stock Average plunging -2.5%. In China, the Shangha Composite Index dropped -2.7%.