US employment data released last Friday was surprisingly encouraging. November nonfarm payrolls dropped only -11k, the smallest decline since December 2007, while unemployment rate fell to 10%. At the same time, there was 159k in upward revisions to the previous two months. Together with upward revision in August nonfarm payrolls last month, there have been 3 consecutive months of upward revisions.

Commodities rallied shortly after the report but gains were pared as USD strengthened upon speculations that the FED would raise interest rates sooner than previously anticipate.

Over the week, Reuters Jefferies CRB Index rallied to as high as 279 Tuesday but ended the week largely flat at 273.9.


Crude Oil

Despite initial rally to 77.9 after US' upbeat employment report, crude oil erased the gains and plunged below 75 upon USD's rebound. The benchmark contract ended the day at 75.47, -1.3% lower. On weekly basis, crude oil slid -0.8%.

Earlier in the week, the UAE central bank said that it 'stands behind' the country's banks, both local and foreign, in facing Dubai World's possible default. This relieved investors' concerns about sovereign risk and increased their bets on commodities. USD's retreat as risky assets recover also increases allure for commodity investments Crude oil price also advanced more than +3% in 2 days.

However, price reversed direction after the industry sponsored API estimated large stockpile increases in crude oil and other oil products. The bad news was echoed by the official inventory report by the US Energy Department (EIA). The API estimated crude rose +2.9 mmb to 339 mmb, gasoline stockpiles increased +3.4 mmb and distillate stockpile gained +1.1 mmb, in the week ended November 27. EIA's readings were slightly between failed to wipe out the fact that fundamentals in the energy market remained poor. Crude oil inventory increased +2.09 mmb to 339.9 mmb in the week ended November 27. Cushing stocks soared for the 5th consecutive month, further widening spread between WTI and Brent crudes. Gasoline stockpile also surged +3.996 mmb to 214.1 mmb after a +1 mmb increase in the prior week. The only encouragement came from distillate stockpile which drew -1.1 mmb to 165.7 mmb. Refinery runs remained low and demands were stagnant.

It was surprising that crude oil failed to rally despite strong employment data. In fact the main reason is USD's strength. The dollar soared against major currencies after the report amid market speculations of earlier Fed tightening. The dollar rose +1.4% to 1.4841 against the euro Friday. It's the biggest daily gain for the USD since June 15.

There have been speculations about OPEC's production as the organization will meet on December 22. However, it's not likely that any change will be seen judging from the development so far.

OPEC members are satisfied with current level of oil prices. Officials from Kuwait, Algeria, Libya and Qatar said they anticipate the OPEC to maintain production targets. Shokri Ghanem, official from Libya, said 'I don't think any change will be taking place'.

As both demand and supply will continue to be stagnant, crude oil price should remain trading in recent range of 72-82 in coming few weeks.


Natural Gas

Unlike crude oil, gas price rebounded +2.9% to 4.586 Friday as boosted by strong employment data and anticipated cold weather in the coming week. Despite the one-day rally, the benchmark contract still plunged to -12% over the week.

Meteorologist forecast temperatures in the north-central and Northeast regions may drop 5 to 6 degrees below normal, reaching as low as 24 degrees Fahrenheit (-4 Celsius) in Boston on December 11 and 9 degrees in Chicago on December 10. Investors hoped that cooler weather will boost gas consumption and hence reduce inventory level.

According to the US Energy Department, stockpiles build +2 bcf to a record 3837 bcf in the week ended November 27. Although the increase was much lower when compared with previous week, it remained a dismal result as storage levels in the week normally drop around -40 bcf, based on the five-year average.

Another positive driver for gas price was that the Gas Exporting Countries Forum will meet next week to discuss ways of stabilizing natural gas price. According to Qatar's Oil Minister Abdullah bin Hamad al-Attiyah, 'Gas should have a premium, it is a clean fuel, it is a choice fuel'.



Precious Metals

Gold slumped Friday amid strength in USD. Gold futures for February delivery plummeted -4%, the biggest drop since December 1, 2008, to 1169.5. Furthermore, the yellow metal slipped for the first time in 5 week, by -0.5%, on weekly basis. However, we believe the plunge did not alter its long-term bullishness.

Silver price tumbled -3.2% Friday but managed to gain modestly for week. That said, silver's upward movement has been more erratic as the metal is also affected by outlook of industrial production.

Factors driving gold price higher continue to be low real interest rate, weak USD and strong investment flows. Low real interest rate environment is particularly helpful for gold as the yellow metal yields no interest. Lower interest rates in currencies mean lower opportunity cost in investing in gold. We believe gold can enjoy the current ride at least until towards end 2009 and first half of 2010 as the major central banks including the Fed, ECB, BOE and RBNZ should maintain their policy rates at low level for an extended period of time.

Take a look at US rate. Gold's recent rally was preceded by an abrupt surge in net speculative long positions. The chart below shows that increase in net longs was also a precedent of decline in US real interest rate (as demonstrated by 10-year TIPS). As real interest rate declines further, this implies gold should have more go. The biggest downside risk for gold is earlier-than-expected Fed tightening, especially current inflationary pressure remains low. However, we do not believe it will happen until mid - 2010.

In the near- to medium, gold price should continue to benefit from robust ETF buying, accumulation by central banks in emerging economies and reduction in European central bank sales. Bank Rossii, Russia's central bank, reported its gold holdings increased +13% from a month ago, to $23B on December 1. The country plans to increase gold holdings as a way to diversify its currency reserves. In Asia, central bank buying should continue after robust accumulation of IMF's planned sales in November.



Base Metal

Rallies in equity markets and increase in risk appetite have lifted base metal prices higher. Copper and aluminum prices even surged to new 2009-high last week. However, the rises seemed to have overextended as inventories at the LME, particularly for nickel, copper and lead, continue to increase.

Moreover, nickel price has retreated since October after failing to re-test the high made in August. History showed that nickel's movement leads other base metals by several weeks. Investors are advised to be cautious on any correction in the base metal complex.