WTI crude oil prices fluctuated but eventually ended the day with mild losses. The February contract slid -0.17% to 91.38 as operations of Alaskan pipelines resumed and IEA reported OPEC has quietly raised its outputs. The March contract for Brent crude, however, recovered modestly after dropping on Monday. The IEA said that 'Brent is gaining more acceptance as the global benchmark given its prominent roles as a price link to European, Asian and Middle East crudes... Market participants have also commented that Brent may currently be gaining favor because its price structure is less influenced by long-only fund investors'. After falling to as low as 1356.8, gold rebounded as driven by strong physical demand and weakness in the US dollar. The benchmark contract added +0.57% to 1368.2 yesterday.

All 3 major oil agencies, EIA, OPEC and IEA, have raised forecasts on global oil demand for 2010 and 2011. Supplies from non-OPEC countries will also increase to absorb higher demand. Instead of being thrilled by the demand upgrades, investors were concerned that the OPEC increasing its outputs quietly. In OPEC's report, it's unveiled that compliance level for OPEC-11 dropped to 54.0% in December. IEA's estimate also showed that OPEC-11's compliance slipped to 58% in December, down from 60% the previous month.

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We expect the OPEC will increase production further this year as Brent crude is approaching $100/bbl. It's necessary for the cartel controlling the world's 40% of oil output to act to prevent price to rise excessively. Although oil price may rise above $100/bbl in coming month, the same history in 2008 should not be repeated as the OPEC can manipulate its spare capacity to control price. The EIA forecast that spare capacity in the OPEC was 4.67M bps in 2010 and will remain above 4M bpd in 2011 and 2012, compared with 1.48M bpd in 2008. In Saudi Arabia, oil output in 2010 remained well-below that in 2008 while production capacity has risen in 2010. We are comfortable that the OPEC has the buffer to react when oil prices rise to 'undesired' levels.

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Recent decline in gold price has attracted physical demand. US Mint reported that gold coin sales has reached 63K oz so far in January, equaling 75% of the sales of the complete month in January 2010 and exceeding the total sales of December. Perth Mint in Australia, the producer of about 6% of the world's bullion, also reported a surge in demand as gold prices fell below 1400. Indeed, the producer said in November that it targets China as the key market as many banks are allowed to import gold.

On the macro front, the Bank of Canada left the overnight rate unchanged at 1%. While acknowledging stronger pace of economic recovery, the central bank stressed that persistent strength in Canadian dollar and sovereign crisis in the Eurozone are threats to global and domestic growth.