Energy Prices Remain Soft Despite Recovery

According to the US Energy Department, crude stockpile rose +3.7 mmb to 331 mmb. Increase in utilization rate to 81.3% from 79.9% failed to offset decline in demand and rise in imports, contributing to the sharp surge in inventory level. Although Cushing inventory drew -1.2 mmb, it remained a disappointing reading and indicated weakness in energy fundamentals.

Gasoline inventory surged for the second consecutive, by +3.79 mmb, to 223.5 mmb with builds mainly seen in East coast and Gulf coast. Although production dropped -6%, imports rose +14% and demand remained at low levels (8.7M bpd). The findings by MasterCard last week said that cold weather has been reducing driving and thus gasoline consumption. We believe this was one of the impacts to the weak demand. Furthermore, higher retail gasoline prices (retail average regular gasoline prices rose +5% in the first week of January) might have restrained consumption.

Gain in distillate stockpile (+1.35 mmb) was surprising as the market anticipated a drop of -1.3 mmb. The build was driven by imports which increased +0.25M bpd to 0.537M bpd, the biggest weekly imports since 2006. Although demand rose modestly, it was more than offset by rise in production and imports. Heating oil stocks actually dropped -3% but heating oil prices plunged in tandem with others in the complex.

Gold price rebounded sharply after touching an intraday low of 1118.5. The February contract closed at 1136.8, up +0.7%. Today, the yellow metal edges higher and is currently trading at 1142. The Beige Book released by the Reserve Bank of Philadelphia showed some economic improvements but these were not sufficient to trigger a Fed rate hike. The dollar has lost momentum to go higher since the December employment report and recent economic news has failed to reboot it.

The Beige Book covering the period from late November through January 4, 2010 indicated that 10 out of 12 districts showed economic improvement. This suggested recovery has been more widespread compared with the previous reporting period when only 8 out 12 districts showed improvement. However, overall growth which stronger than 2008, remained at low level compared with pre-recession level in 2007.

Employment condition conditioned to the major issue. With the general outlook remained 'soft', consumer spending and housing market were lackluster. In a TV interview yesterday, the NY Fed President William Dudley said that he needed to see growth in jobs before he would support a rate hike. These comments disappointed hawks and weakened the dollar.