Crude oil price continues to edge lower gradually as economic data released in Europe failed to deliver a concrete message for sustainable economic recovery. Stock markets trade sideways, awaiting more clues on growth outlooks.

Final reading on the Eurozone's services PMI was revised slightly upward to 50.9 in September while the Sentix Investor confidence improved to -12.6 in October (consensus: -12) from -14.6 a month ago. Moreover, retail sales slid another -0.2% mom in August. In the UK, services PMI rose to 55.3 in September, from 54.1 in the prior month. To net, these indicators came in largely inline with market expectations and gave no surprise that the economy is expanding rapidly.

European Stock markets fluctuate between gains and losses in morning session. UK's FTSE 100 Index trades flat from last Friday while Germany's DAX and France's CAC 40 add +0.1%.

After failure to breach the resistance at 75 in mid-August, WTI crude oil has been trading within a trading range of 65-75 since then. We find that crude oil's performance has been lagging that in stocks and the euro. This suggests that investors are paying more attention to energy fundamentals, rather than just being thrilled by market sentiments.

Record high inventory level, weak fuel demand (especially distillate) as well as slippage of OPEC compliance (compliance of 68% in August, compared with over 80% in 1Q09) has depicted a worrisome picture in the near-term. In fact, such backdrops do not justify current oil price level (around 70/bbl).

Then what makes the current price sustain? We believe it's due to market forecasts of improving distillate demand in 4Q09. Apart from the traditional heating season in the fourth quarter as we enter winter, investors' anticipation on rising distillate demand has hinged on improvement in US industrial production. Annual contraction in IP has moderated to -10.7% in August after reaching a trough in June (-13.3%). Continued recovery in IP probably will lead to more consumption in distillate.

Gold remains in consolidative mode but will likely gain for the second straight day amid weakness in USD. Others in the precious metal complex also climb higher with platinum rising to 1290 after plunging for 2 days to as low as 1266.4 last week. Silver also rebounds to 12.3.

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