Crude Rises but Not Sustainable. EIA Revised Down Oil Demand Forecasts

As driven by a late-rally in the Wall Street, WTI crude oil price ended the day with small gains. After market close, API's report showing a dip in crude inventory boosted the market further. However, we doubt if the strength can sustain as sovereign crisis in the Eurozone has shown intensified signs of contagion. Gold price retreated after hitting a new record at 1254.5. Yet, outlook is still bullish for the yellow metal as long as worries over deficits problems persist and uncertainty over global economic outlook remains.

US stocks traded without direction for much of the NY session as European markets weakened while Asian equities edged higher. However, investors later found the strong reading in NFIB confidence and Chicago Fed President Evans' comments as reasons to bid up prices. DJIA and S&P 500 gained +1.3% and +1.1% respectively at close. National Federation of Independent Business (NFIB) said confidence among US small businesses rose to a 21-month high of 92.2 in May with 7 out of 10 components soaring. Evans' said that deteriorated trade effects of the European fiscal situation on the US economy are likely to be 'limited'. While the risks that fiscal problems in Europe may have a more severe impact on financial markets cannot be ruled and worth monitoring, the Fed President did not see the risks have occurred so far. Concerning economic growth, Evans echoes Fed Chairman Ben Bernanke's comment that growth is at moderate pace and the Fed's monetary policy is 'appropriate, very accommodative'.

The front-month contract of WTI crude oil rose +0.77% and settled at 71.99 Tuesday. While it was mostly driven by rally in US stocks, API's data showing another week of inventory draw (by -4.54 mmb) helped support price. The contract soared to 72.7 in Asian session today.

In its monthly Short-term Energy Report, the US Energy Department cut its forecasts for global oil demand to 85.51M bpd for 2010, compared with May's projection of 85.59M bpd. For 2011, the demand outlook was also taken down to 87.12M bpd from 87.19M bpd estimated in May. The Department also revised downward WTU crude oil spot prices to 79 and 83 for 2010 and 2011, respectively. Both were around 3 dollars lower than last month's forecasts.

Gold price surged and hit a record high of 1254.5 yesterday as Fitch Ratings warned that UK's fiscal challenge is formidable and the government needs to accelerate fiscal consolidation measures. Fitch's comments reignited worries over fiscal problems in countries other than peripheral European economies.

In debt-ridden countries in the Eurozone, things are not getting better. In Spain, 12% of public workers joined a strike opposing the government's budget-cutting plan. Although the operation of EU/IMF's 750B-euro European Financial Stability Facility (EFSF) has become clear, the market remained skeptical of its effectiveness to contain the sovereign crisis. 2-year and 10-year German bunds remained firmed against peripheral European bonds as the market feared auctions in Spanish and Portuguese bond offering later this week would fail. This would exacerbate worries over contagion.

In the US, the 3-year bond sales were well-received with a year of 1.22%, the lowest level since January 2009. The fact that the auction remained popular despite the low yield indicates investors' demand for safe haven and the phenomenon is positive for gold.

Weekly change in inventory as of 04/06/10
Change
Market Expectation
Previous

Crude oil

-0.90 mmb
-1.90 mmb

Gasoline

-0.30 mmb
-2.65 mmb

Distillate

+0.40 mmb
+0.45 mmb

Comparison between API and EIA reports:

API (Jun 4)

EIA (Jun 4 )

Actual
Inventory
Previous

Forecast (using API's inventory level)
Inventory

Crude oil
-4.54 mmb
357.0 mmb
-1.42 mmb

-6.24 mmb
357 mmb

Gasoline
+1.48 mmb
220.7 mmb
-0.96 mmb

+2.02 mmb
221 mmb

Distillate
+3.00 mmb
155.8 mmb
+0.85 mmb

+3.01 mmb
156 mmb

API collects stockpile information on a voluntary basis from operators of refineries, 76% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA