Crude oil climbs to 60.7 in European morning as driven by surge in stock markets. Market sentiment recovers swiftly after the US released disappointing housing data yesterday. In Asia, the MSCI Asia Pacific Index rose 0.5% and Japan's Nikkei 225 Stock Average gained 0.6% although Government data showed that GDP in the world's second largest economy contracted -15.2% yoy, the sharpest fall in record, in 1Q09 as export plunged sharply.

In Europe, UK's FTSE 100 Index changes little after the BOE released minutes for the meeting in May while Germany's DAX and France's CAC 40 partly offset previous gains after contraction in Germany's PPI.

The BOE minutes revealed that policymakers voted unanimously to extend the asset purchase program to 125B pounds and to keep interest unchanged at 0.5%. The central bank said there has been a persistent degree of slack forecast for the economy and there's high possibility for inflation to undershoot target level of 2% in the medium term. Moreover, Germany's PPI contracted -2.7% yoy in April, worse than consensus of -1.3% and -0.5% in March. It's the lowest level since 1987.

The relatively stable equity markets despite weak economic data indicate how strong the sentiment is. Risk appetite has improved significantly since a few weeks ago. The VIX, an index gauging investors' risk tolerance, dropped to 28.8 yesterday, the lowest level since Lehman Brothers' collapse in September. Investors tend to place more attention to positive data rather than negative ones.

The market factored in another week of withdrawal in crude and gasoline inventory in the US. The huge drop in stockpile as reported by API Tuesday may lead to pleasant surprise from the US Energy Department later today.

US Oil Inventory

Weekly change in inventory as of 13/05/09ActualMarket ExpectationPrevious
Crude oil+1.15mmb-4.63mmb
Gasoline-1.00 mmb-4.15 mmb
Distillate+2.00 mmb+0.92 mmb

Comparison between API and EIA reports:

API (May 13)EIA (May 13)
mmbActualMarket expectationInventoryForecast (using API's inventory level)Inventory
Crude oil-4.47 mmb-0.68 mmb366.2 mmb-4.63 mmb366 mmb
Gasoline -5.37mmb-0.98 mmb206.2 mmb-2.29 mmb206 mmb
Distillate+1.41 mmb+0.72 mmb145.8 mmb-1.46 mmb146 mmb

Source: Bloomberg, API, EIA

The bullish sentiment also pushes LME copper to 4590. In the longer-term, outlook for copper may benefit from the economic recovery in China as well stabilization in global contraction. However, in the near-term, we remain bearish on the ‘red gold' as the theme, robust demand from China, pushing the metal higher has played out.

To be more precise, recent rally was driven by strategic stockpiling by the Chinese Government, purchase by industries as spurred by the stimulus plan as well as pre-stocking prior to peak season in the second quarter. However these effects seemed to have diminished now. Moreover, while we have witnessed decline in inventory level in LME warehouse, stocks have picked up in Shanghai. This indicated the ample quantity purchased in previous months has been idled.