Crude oil retreated on Tuesday after the strong rally over the past 2 days. However, price remained firm with the front month WTI contract staying above 90 while that for Brent crude hovering around 100. The political unrest in Egypt resulted in temporary suspension of drilling at some oil and natural gas fields. While it's reported that Suez Canal operations remain unaffected for now, the market still worried about potential disruption of oil supplies.

Suez Canal connects the Red Sea and Gulf of Suez with the Mediterranean Sea. According to the DOE/EIA, petroleum (both crude oil and refined products) accounted for 16% of Suez cargos in 2009. An estimated 1M bpd of crude oil and refined petroleum products flowed northbound through the Suez Canal to the Mediterranean Sea in 2009, while 0.8M bpd travelled southbound into the Red Sea. Almost 35 000 ships transited the Suez Canal in 2009, of which about 10% were petroleum tankers. Meanwhile, the 200-mile long SUMED Pipeline, or Suez-Mediterranean Pipeline, provides an alternative to the Suez Canal as it moves crude oil northbound from the Red Sea to the Mediterranean Sea. Transit through the pipeline was 1.1M bpd in 2009, falling from approximately 2.3M bpd in 2007. Closure of the Suez Canal and the SUMED Pipeline would divert tankers around the southern tip of Africa, the Cape of Good Hope, adding 6 000 miles to transit. Suspension of Suez Canal or SUMED pipeline's operations would disrupt the oil market.

Gold recovered but price continued to move within a narrow range. The metal benefits from geopolitical tensions but is pressured by improved US outlook reduced its demand. The net result is sideways movement. While the metal may have further downside to go as global economic data continue to show improvements in advanced economies, the drop in investment demand in the West should be absorbed by the increase in physical demand in Asia.

On the macro front, China's 2 manufacturing PMIs were mixed in January, with the PMI from the government slipping to 52.9 in January from 53.9 in the prior month while and the reading compiled by HSBC improving marginally to 54.5 from 54.4. That said, the level of new orders in both manufacturing PMIs remained strong, signaling growth will accelerate further in 1Q11. We expect the Chinese government will tighten its monetary policy further, through raising interest rates and increasing reserve requirement ratio, in order slow growth and inflation. In Europe, PMI in the Eurozone rose to 57.3 in January from 56.9 in the prior month while that in the UK improved to 62 in January from an upwardly revised 58.7 in December. The market focus is the ISM manufacturing index in the US. The reading probably climbed +0.9 points higher to 57.9 this month.