The 2-day EU summit was the focus of the week. European leaders endorsed a Franco-German proposal, consisting of bilateral loans and IMF's involvement, to assist Greece in overcoming its deficit crisis. While the size of the loans and interest rates were left unclear, the market felt relieved with the euro rebounding +1% against the dollar, while yield spread between Greek and German government loans dipped -9 bps. Risk appetite increased and commodities pared losses made earlier in the week.
However, we view the relief as temporary. Although sovereign crisis in Greece is almost over, deficit problems have not disappeared. Downgrades of Portugal's rating by Fitch indicates Greece's issue is contagious to peripheral European countries.
Gains in risky assets were capped as US GDP was revised down. The 4Q09 GDP was revised down to +5.6% from preliminary forecast of +5.9%.
Although the EU-IMF agreement on Greece's deficit problem restore market sentiment and pushed crude oil to as high as 81.46 Friday, downward revision in US GDP dragged price lower. The benchmark contract closed at 80, losing -0.66% and -0.84% on daily and weekly basis, respectively.
Oil price has been able to hold above 80 in spite of strength in USD and lingering Greece's sovereign crisis. Although US crude oil inventory surged more than 7M barrels last week. Investors took increases in fuel demand as a sign of recovery.
According to the US Energy Department, crude oil inventory surged +7.25 mmb to 351.3 mmb in the week ended March 19. Despite unchanged utilization rate at around 81%, imports surged +12%. The increase exceeded market expectations but inline with API's estimates. Cushing stock also rose +0.53 mmb.
Investors dumped oil initially after the report but then prices rebounded, possibly due to big draws in oil product inventories. Gasoline inventory dropped -2.72 mmb to 224.6 mmb, Demand increased +2.7% to 9.087M bpd on weekly basis. Distillate stockpiles drew -2.42 mmb as production slid -2.4% while demand rose +1.2% to 3.809M bpd.
As we mentioned in previous articles that growth in oil demand will continue to be driven by emerging markets while OECD demand remains weak. According to the latest data by Joint Oil Data Initiative (JODI), oil demand from OECD economies plunged -1.96M bpd in January, down further from a -0.9M bpd decline a month ago. However, note that most of the fall, around 85%, came from Europe. For the rest of the the OECD, decline moderated to -0.3M bpd in January. We expect the situation will turn better later in the year as adverse weather in January/February may affect the readings.
Gas price extended weakness Friday as increase in inventory in the US evidence dismalness in the market. The front month contract has dropped for 7 consecutive weeks and plunged -7.12% last week.
Huge selloff in 2009 and almost -30% decline since the beginning of the year have triggered concerns from gas exporting countries. Algerian Energy and Mines Minister Chakib Khelil said he'd propose supply restrictions on the spot market as an upcoming meeting on April 19.
It was expected that gas market will be tightened by the sharp drop in gas rigs last year. However, such hope probably is in vain. Despite the decline in rig counts, domestic production did not fell much as shale and some of its wells have had very high initial production. At the same time, rig counts have recovered swiftly from the lows in of 665 units in July 2009 to 941 units in the week ended Mar 26, 2010.
Worse still, liquefied natural gas (LNG) delivery is rising rapidly. US imports of LNG will rise +45% in 2010 to approximately 1.8bcf/, according to the US Energy Department. The estimate for 2010 imports was, however, -1.6% lower than the February forecast.
Gold price rose strongly Friday as the euro rebounded from the 10-month low against the dollar after the EU and the IMF agreed on a bailout plan to Greece's debt when needed. This soothed market worries temporarily. However, in the medium- to long-term, we continue to worry about the euro and believe investors will continue to diversify away from the single currency given the miserable debt situations in many of its member countries.
Persistence weakness in the euro may affect gold in 2 ways. If investors dump the euro as they lose confidence in currency, they should be turning to physical assets including gold and other precious metals. This is positive for the yellow metal. However, if weakness in the euro leads to further strength in USD, this would limit upsides for gold as the greenback and the yellow metal are trading in opposite directions for most of the time in history.
While most precious metals dropped less than 1% last week, palladium plummeted -2.82% to close at 455.3. We believe this was driven by correction after price had reached a decade-high level in the prior week. Fundamentals in PGMs remain firm. Together with robust ETF investment, we prefer PGMs to gold and silver.