WTI crude oil extends the 8th day of rally above 80 on speculations for growth in energy demand as US weather remains below-normal. The February contract surged to as high as 81.16, the highest level since October 26, in European session. While macro-economic outlook and equity market performance will continue to play a role in driving crude oil price, a stronger emphasis will be placed on fundamentals this year than in 2009.

Crude oil price advanced +78% in 2009. However, US oil inventory reached the highest level in almost 2 decade. Look at timespreads, the steep contangoes also suggest severe oversupply in the market. At the same time, the correlation between oil price and stock market rose to 45% in 2009, almost doubling that in the prior year. These evidenced that the strong performance of crude oil last year was driven by macroeconomic outlook and market anticipation of better fundamentals in the future.

As we enter 2010, investors should focus on demand growth. Again, it's widely expected that China will remain the locomotive for growth. According to the US Energy Department, crude oil demand should rise +1.1M bpd to 85.219M bpd in 2010. Of the 1.1M bpd increase in demand, 0.405M bpd will come from China while only 0.09M bpd from OECD economies.

In 2009, the inverse correlation between USD and crude was prominent. However, this pattern may fade this year. The impact of the dollar's movement on crude oil depends on its cause. For instance, if USD rises as the US economy improves rapidly and outpaces other countries. This would benefit commodities.

Gold price rebounds strongly to 1118 in European session. Having traded below 1100 for most of the time in the last 2 weeks, the yellow metal appears 'cheap' to buyers. Unlike crude oil, we expect strength in USD will continue to pressure gold. In fact, the pile-up of huge short USD/long gold positions in 2009 remains an overhang on gold's outlook.

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