Strong trading momentum continued to provide support to commodity prices despite slow fundamental outlook and mixed macroeconomic indicators.

 Reuters/Jefferies CRB Index surged +2.2% to close at 257.45 as driven by rallies in stock markets and weakness in USD. Dow Jones Industrial Average rose +0.86% and +8.6% on weekly and monthly basis respectively. S& P 500 Index also surged +0.8% to 987.48 last week, the highest since November 4. Shares in Asia also advanced with the MSCI Asia Pacific Index gained +3.6% to a 10-month high at 111.8. On monthly basis, the gauge jumped +8.4%.

 US' GDP contracted at a -1% annual rate in 2Q09, better than market expectation of -1.5% and -6.4% in the prior quarter. Most of the improvement was driven by business capital spending which declined -9% compared with -39% in 1Q09. Moreover, drop in inventory level has been speeded up. However, consumer spending unexpectedly dropped -1.2% following a rise of +0.6% in the previous quarter.

 USD lost for the 4th consecutive week as sentiment remained robust. The dollar index slid -0.5% to 78.34, the lowest weekly close since September 2008.

 Crude Oil

Crude oil price experienced another strong day Friday as boosted by upbeat US GDP report. The September contract for WTI crude surged +3.7% to settle at 69.45, the highest in almost a month.

 Volatility was high for energy prices last week. In the early part of the week, price dived more than -8% to as low as 62.7 because crude oil inventory surprisingly recorded huge gain while US consumer confidence fell more than expected. After the industry-sponsored API reporting more than 4mmb inventory gain Tuesday, the US Energy Department announced +5.15 mmb increases in crude stockpile to 347.8 mmb the next day. This halted the 7 consecutive weekly declines in inventory. Added to the worry was inventory in Cushing Oklahoma alone, the delivery point for WTI oil, rose by 1.3 mmb.

 However, price pared losses dramatically with price jumping almost +10% the next 2 days amid rallies in stock markets and weakness in USD. Strong corporate earnings, better-than-expected jobless claims data as well as 2Q09 GDP reports became the best excuses for bulls.

 We still find it far-fetched for oil price to firmly break above 70 although rally on Thursday and Friday demonstrated how strong trading momentum is. We believe price will continue to trade with a range of 60-70 in the near-term.

 It's true that only a week of inventory gain cannot indicate a change of trend and it's still possible for crude inventory to draw again in coming weeks. However, what we worry about is the weak demand in oil products. Over the past few weeks, we have mentioned that high margins incentivized refinery utilization. However, productions mostly remained idled in warehouse as there's not enough demand to absorb. We believe this is the present situation we are facing as indicated by the huge stockpile increase in oil products, especially for distillate.

 Although crude oil stockpile has reduced over the past few months, the sharp increase in product inventories have resulted in increase in total petroleum products inventories. The situation does not only occur in the US but also in other OECD countries. While OPEC productions have reduced significantly and global refinery utilization rates have increased in the past few months, sluggishness in demand has pushed oversupply in crude into product inventories.

 Recently, we have discovered signs of recovery in the number of oil rigs although gas rigs remain at historical low. According to Baker Hughes, oil rig counts increased to 261 as of July 31, +14% from 4 weeks ago. This also represents an increase of +46% from 4-year low of 179 units in early June. This suggested that oil drilling activities has begun recovery in the US and it's likely that international oil drilling recovery will follow in coming quarters.




 Natural Gas

Gas surplus remained the number 1 concern for investors and the benchmark contract plunged -2.4% to settle at 3.65 Friday despite broad-based rally in the energy complex. Over the week, price dropped -5.4%.

 Gas storage rose +71 bcf to 3023 bcf for the week ended July 24. The amount was +19% higher than 5-year average. According to Baker Hughes, the number of gas rigs increased +2 units to 677 units in the week ended July 31.

 After making a peak at 13.69 in Jun 2008, natural gas price has nosedived more than -70% and price has been hovering at record low levels over the past few months. The situation that the gas market facing is a knot: reduction in supply will boost price to a level that trigger production which in turn drag down price again. We believe this knot can only be untied by recovery in demand.



 Precious Metals

Dollar's weakness and rally in commodity prices drove gold price higher Friday. The benchmark contract for the yellow metal rose +2% to 955.8. While price was largely flat on weekly basis, gold's movement was volatile with price plunging sharply to as low as 925 Wednesday, as both commodities and stocks fell while USD rebounded, before recovering above 950 level Friday.

 Looking at a bigger picture, gold continued within a range of 900 and 960 over the past 2 weeks. While the strongest price driver in the near-term remains USD, some other factors have resulted in gold's recent 'sideways' movement.

 First, investors concern about IMF's gold sales since its announcement in April. Recently, the world lender has indicated plans to sell 403 metric tons of its gold holdings so as to provide loans to developing countries. Detailed plans should be outlined in the new Central Bank Gold Agreement which will be released soon (as the existing one will expire in September). Although IMF's sales of gold may weigh on price, this will be partly offset by great reduction in gold sales by central banks.

 Second, inflation expectations have diminished as global CPI data have remained in downtrend and policymakers continue to reiterate that inflationary pressure is subdued despite the massive stimulus policies.

 Third, the expansionary monetary policy in major central banks seems to be approaching the end. While the Fed, BOE, ECB, BOJ, RBA, etc will maintain their policy rates at unprecedentedly low levels throughout 2009 and at least early 2010, the market has already speculated rate hike in some countries. For instance, swap trading index showed the RBA will increase interest rate by 1.17% to its 3% target in the coming 12 months after the central bank's July meeting. Bets were for a 98 basis point increase the day before Stevens' speech and 56 points at the beginning of July.

 In our view, the exit from the aggressive stimulus pressure is bumpy and with real interest rate remains low and budget deficits stay high, gold price still has potential to break recent range and surge above 1000 level.

 Base Metals

LME copper price closed +2.1% higher to settle at 5719 after making another fresh 2009 high at 5750 Friday. Over the week, the metal gained +3.6% and its movement continued to closely track that of the stock markets and ignored fundamentals.

 Consistent with the situation in other base metals, copper recorded inventory inflow in LME warehouse last week. In fact, stock level has risen +9% to 281K metric tons from recent low of 257K metric tons in July 10.

 At the same time, cancelled warrants has returned to normal level after rocketing to the peak in April/May, suggesting extraordinary (i.e. SRB buying from China) demand has disappeared.

 While the above facts suggested copper price to correct in coming weeks, should macro-economic data such US ISM index come out stronger than expected, these will provide support to the base metal.