Crude oil price erases earlier gains and retreats to 71.4 in European morning on profit-taking. Moreover, economic data just released showed that economy is not out of wood yet. In the UK, 1Q09 GDP was revised down to -2.4% qoq from preliminary estimate of -1.9%. The revision came in worse than consensus of -2.2% and confirmed the biggest contraction in more than 50 years. Eurozone's CPI dropped -0.1% yoy in June, the first negative reading since the gauge began in 1996.Both the pound and the euro pare gains against the dollar after the results.
Effective midnight today, the National Development and Reform Commission (NDRC) announced to raise ex-refinery gate prices for gasoline and diesel by RMB 600/tons, or +10 and +11% respectively, after the +8% price hike on June 1. Ex-refinery gate price for jet fuel is also increased by RMB 1030/tons or +26%. This is the 4th time that the NDRC adjusted price since the new pricing mechanism was introduced on December 19, 2008.
Although we still expect another round of increments in early August as the new prices are still not enough to compensate for the recent oil price rally, the increase today should help Chinese refiners. Research shows that Sinopec (0386.HK) will be able to achieve refining margin of $7-8/bbl with this increase. The price hike on June 1 was disappointing both in timing and in size and the market questioned about the NDRC's commitment to the new pricing mechanism. However, the current round of increase should have helped restore market confidence in it.
We still believe the news will benefit Sinopec (0386.HK) the most from the move given its biggest exposure to refining in China. As of 1Q09, refinery business contributed 44% (RMB 7.3B) of the company's operating profit with the rest of the business in E&P, marketing and distribution, and chemicals.
Petroleum contributes around 2% China's CPI and it's estimated that direct contribution of the increase today will be around 0.2%. (For more details about China's oil product pricing mechanism, please click here .)
Benchmark contracts for gold and silver continue to hover around 940 and 14 respectively but near-term outlooks for both remain uncertain and dependant on evolvement of USD.
India's National Spot Exchange, the country's biggest bourse for physical gold trading, will offer mini-sized gold contracts in sizes from 8g to 1 kg, aiming at households who are holding as much as 25K metric tons of gold. Currently, the commodity bourses in India only trade gold futures so that people who want to trade physical gold need to do that in banks or jewelers. The new instrument gives a new channel for the households to trade the precious metal.
Global banks such as Citibank, HSBC, Scotiabank and Standard Bank also have great interest in expanding gold trading business in India, the world's biggest consumer for the yellow metal. Among them, Scotiabank, the second largest bank in Canada, has applied for right to start wholesale trading and hedging in precious metals. Upon approval, the bank may partner with HDFC Bank or ICICI Bank to start trading of gold and other precious metals.