Crude oil retreats sharply to 49.4 from Friday's close at 51.55 as investors worry that the outbreak of swine flu will hinder economic recovery. Comments from Algerian oil minister Chakib Khelil regarding oversupply in oil market added to the pessimism.
Last week, swine flu broke out in Mexico and has extended to the US. In Mexico, officials has just raised its figure of death thought to be caused by the virus to 103 while an additional 1614 cases were reported in the country. Health officials around the world are checking to see if infections have occurred in their countries and preventive measures are being considered. Stock markets also plunge today. In Asia, the MSCI Asia Pacific Index dropped 0.3% with airlines and banking stocks leading the decline.
Algerian oil minister Chakib Khelil said there's an oversupply of 0.72M barrels from non-OPEC countries which do not seem to be co-operating the output reduction. Production cuts by the OPEC since September 2009 failed to push price to the $70-75 target. In 1Q09, average price was 43.32 while a medium term trough was probably made at 32.4 last December. The minister remained skeptical on whether Saudi Arabia will agree on further reduction as this may prolong the recession.
According to Commitment of Traders report by CFTC, crude oil futures report net short speculative position last week. This indicates that traders are playing the strategy of selling above 50 and buying below 40.
Gold soars to 916 Monday morning. Near-term outlook turns more positive as market participants become anxious about the world economy, especially with the outbreak of the flu. We see obviously that investors have shifted from high yield investment to safe haven trading today. In the currency market, Japanese yen rises to as high as 96.53 against the dollar, the highest since March 30. Concerning the dollar, it surges together with gold's strength today. The dollar index rebounds to 85.3 while against the euro, it rises to 1.315.
Moreover, bullion purchase from China last week spurred speculation that more buying will take place later. This does not only raise prospect of gold but also cause weakness in the dollar in the long-run because the rationale behind is to increase gold holding so as to reduce the proportion of USD in the reserve.