ONG Focus - Insights Written by Oil N' Gold Sat Mar 13 10 12:47

ET Last week, the Chinese government released a set of macroeconomic data which spurred speculations on further monetary tightening. Headline CPI surged +2.7% y/y, the highest in 16 months, in February. PPI also beat market expectation and rose +5.4% y/y during the month. Other than price indices, retail sales, industrial productions and fixed asset investment also signaled that the government should act further to prevent overheating in the economy. Other than raising required reserve ratios, it's widely anticipated that the People's Bank of China will raise interest rates, for the first time since December 2007, in coming months.

The dollar index slid -0.7% to 79.83 while Reuters/Jefferies CRB Index dropped -1.3% to 273.31 last week.


Crude Oil

Crude oil surged to as high as 83.16 earlier in the day before tumbling to 80.86 after disappointing US consumer sentiment data. The front-month WTI crude oil futures ended Friday at 81.24, -0.32% over the week. In March, oil price has been closing above 80 for most the time, indicating a new floor has been formed at that level. We believe this is driven by positive demand outlook accompanied by improving inventory data.

EIA's oil inventory data beat market expectations. Crude oil inventory increased +1.43 mmb to 343 mmb in the week ended March 5. The less-than- expected build was due to -8% decline in imports being partly offset by -1% drop in utilization rate. Decline in fuel stockpiles is the bright spot. Gasoline stockpile drew -2.96 mmb while the market had anticipated modest gain of +0.15 mmb. The draw was due to lower productions together with +1.2% increase in demand. Distillate inventory dropped for an 8th week, by -2.22 mmb, to 149.6 mmb. The draw was deeper than market forecast of -1 mmb as both imports and production slid. However, demand plummeted -4.8% to 6.645M bpd from a 10-week high of 3.829M bpd last week.

All 3 major oil agencies, the US Energy Department (IEA), OPEC and International Energy Agency (IEA), upgraded global oil demand forecasts for 2010, as driven by stronger-than-expected global economic growth. Geographically, the upgrade mainly came from emerging countries, especially China.

According to EIA, demand from OECD will average 45.48M bpd, down -80K bpd from February's projection, in 2010. OECD consumption will rise to 45.74M bpd (February: 46.01M bpd) in 2011. Consumption by non-OECD countries will increase to 40.03 M bpd in 2010, followed by rise to 41.32M bpd next year. The forecasts were revised up by -0.29M bpd and +1.29M bpd, respectively, from February.

In EIA's forecasts, China will account for over 30% of global oil demand growth this year, subject to upgrades should the Chinese government remains supportive for economic activities with benign inflation outlook. On the whole, consumption in non-OECD countries will average 41.2M bpd this year.

On the contrary, oil consumption in OECD countries is expected to average at 45.4M bpd, compared with 45.52M bpd estimated in February.

China's preliminary trade data for February evidenced the country as the major growth driver to demand growth. During the month, China imported +4.8M bpd of crude oil. The +58% annual increase was driven by strong refinery activities and has made China a net importer of oil again. Given rising importance in China in global economic stage and energy market, fiscal and monetary policy is closely watched by investors worldwide.

Flattening in oil forward curve indicates the market has factored in a tighter spot market. Anticipation of diminishing inventory in the near future has pushed front-month prices toward long-dated prices. If the trend continues, backwardation - spot prices trading above forward prices- in 2010 is foreseeable. However, the situation should prove to be temporary OPEC spare capacity should return to the market later in the year, thus increasing stock levels.

It's wide anticipated that OPEC, the group controlling 40% oil export in the world, will keep quotas unchanged at the meeting on March 17. Oil ministers sounded satisfied with current price level. Compliance is an important issue for member countries to focus on. EAW said in its monthly report that OPEC's compliance with production quotas (24.845M bpd) announced in 2008 fell to 56% in February, from 58% a month ago.



Natural Gas

Gas price declined for the 5th consecutive week despite better-than-expected inventory draw. The front-month contract plunged -4.2% to close at 4.4 during week. The US Energy market attributed to continuous decline in gas price to oversupply.

US gas inventory dropped -111 bcf to 1626 bcf in the week ended March 5. The US Energy Department anticipates inventory to finish the first quarter of 2010 at around 1549 bcf, about +3.5% above the 5-year average. Storage is expected to stay above 5-year average for the first 10 months due to ample domestic production and LNG imports.

Total natural gas consumption will probably rise +0.7% to 62.9 bcf in 2010, followed by a -0.4% decline. Abnormally cold weather in the first 2 months of this year is the main reading for the increase in demand. Total natural-gas-weighted heating degree-days during the first 2 months of this year were 5.5% above the 30-year normal level and the highest for the period since 2004.

The number of gas rigs increased only 1 unit, the smallest gain since December 31, to 926 units in the week ended Mar 12. Total rig counts during the week reached 1407, the highest level since January 30. Breaking down into drilling types, conventional (veridical) rigs remained depressed while unconventional (horizontal) rigs have returned to (exceeded) pre-crisis level. This explains why production remained ample despite decline in rig counts during most of 2009.




Precious Metals

Comex gold fluctuated within 1097.3 and 1119.5 Friday. Although price temporarily broke below 1100, it managed to close above it. The benchmark contract settled at 1101.7 Friday, losing -2.95%. Platinum was the only one in the complex than soared last week. The rise was probably a catch-up of palladium's 10% rally in the prior week.

The dollar's strong rebound has been in progress since late November. Despite the historical inverse correlation between USD and precious metals, the latter has shown mixed performance in this round of USD rally. The chart below shows that PGMs has remained firm despite strength in the dollar while silver has been the worst performer so far.

Apart from recovery in global auto market, PGMs' resilience has been driven by robust flows into ETF investments, particularly after the new US-listed ETFs launched by ETF Securities. Since the above-said ETFs were launched in January 2010, total metal holdings in platinum and palladium ETFs surged +35% and +31% respectively, while that for silver gained only -2.4%. Gold holdings even slid-0.9%. This evidenced the shift of ETF demand from gold and silver to PGMs. In fact, the US-listed platinum and palladium ETFs represent around 30% in each of platinum and palladium ETFs universe, indicating significance of these 2 new funds.


Base Metals

As worries of Chinese tightening loomed, base metals had mixed performance last week. While mead, aluminum and tin managed to edged higher, copper, zinc and nickel got hammered. As the People's Bank of China may raise its benchmark interest rate in coming months, base metal prices will remain under pressure in the near-term.

Other than the threat from tightening, macro data were mixed. Industrial production in China rose +12.8% y/y, compared with market expectations of +19%. However, preliminary trade data showed that demand from China remained strong. Taking the average the January and February data, imports for unwrought copper rose +9% y/y to 562K tons while that for unwrought aluminum surged +39% y/y to 117K tons.