Global financial market weakened early last week as Bank of Spain's takeover of a savings bank called Cajasur and potential merge of 4 other banks unveiled problems in the country's banking system. Moreover, escalated tensions on the Korean Peninsula further weighed on market sentiment. US dollar, Japanese yen and gold surged while stocks, euro and energies slumped.

Things changed dramatically in the middle of the week as OECD upgraded its GDP growth forecasts for 2010 and 2011. OECD predicts GDP across 30 OECD countries will grow +2.7% in 2010 and +2.8% in 2011, compared with November's forecasts of +1.9% in 2010 and +2.5% in 2011. Taking China into account, world growth will be boosted higher to +4.6% and +4.5% in 2010 and 2011, respectively. The projections are higher than average growth of +3.7%. That said, OECD warned that 'instability in sovereign debt markets poses' poses a serious risk and the Eurozone has to 'strengthen its institutional and operational architecture' with bolder measures needed to 'ensure fiscal discipline'. The agency forecasts the Eurozone's economy will rise +1.2%, upwardly revised from November's estimate of +0.9%.

Although rumors that China was reviewing its holdings on Eurozone bonds triggered broad-based selloff in the market, the government's affirmation that Europe is 'one of the major markets for investing China's exchange reserves' boosted prices. Rallies were accelerated as US reported some strong economic data.

Concerns over sovereign crisis, however, returned on Friday as Fitch Ratings cut Spain's credit rate by one notch to AA+ from AAA, reflecting the assessment that 'the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term'.

Crude Oil

After rallying to a 2-week high at 75.72, crude oil price retreated more than -$1/bbl as US consumer confidence missed market expectations. The front-month WTI contract ended settled at 73.97, down -0.78%, on Friday. On weekly basis, the contract surged +5.61%, halting the severe selloff since May 3. In May, WTI futures slumped -14.1%.

Crude oil and product prices surged as OECD revised up its economic forecasts for 2010 and 2011. Rallies accelerated after release of the oil inventory report although the set of data was not exceptionally bullish. Indeed, recent price movements have been driven by macroeconomic and political issues, rather than fundamentals in the oil market.

According to the US Energy Department, crude stockpile rose more than forecast, by +2.46 mmb, to 365.1 mmb in the week ended May 21. Yet, Cushing stock recorded the first dip in 10 weeks. This greatly narrowed the spread between WTI and Brent crude as well as tightening WTI time spread.

Gasoline and distillate stockpiles dipped -0.2 mmb and -0.24 mmb, respectively. Drop in gasoline stockpile concentrated in West Coast where storage was down -1.5 mmb. In all 5 districts, production fell -2.38% but was partly offset by +31.8% increase in imports. Demand was largely flat at 9.099M bpd. Decline in distillate stockpile was seen most in Gulf Coast where storage was down -1.7 mmb. Production dipped -0.78% but was partly offset by +38.3% increase in imports. Demand also slid, by -1.59%, to 4.021M bpd.

As the US driving season begins, gasoline demand is expected to pick up. Recent decline in gasoline price should have further boosted driving interests. The US Energy Department estimated that retail gasoline price has dropped -3.92% to 2.842/gallon in the week ended May 24 from 2 weeks ago. According to AAA, the biggest motoring organization in the US pump price has plunged for 3 weeks to an average of 2.749/gallon as of May 26. While price has risen +12% from the same period last year, it's still -30% lower than 2008. The organization also forecast the number of people having road trips during the Memorial Day weekend will rise for the first time since 2005, by +5.8% y/y, this year.

However, uncertainty in economic outlook and high unemployment are lingering concerns which should limit demand growth. The US Energy Department anticipates motor gasoline demand will increase by around +0.9% this summer.

Distillate price rebounded more strongly than gasoline price last week as investors focused on improved demand in the former in recent weeks. The chart below shows that distillate demand has been picking up since mid-April and has been growing from a year-ago basis since then, reversing the picture in the first quarter that distillate demand remained in contraction.

Natural Gas

Gas price rallied despite bigger-than-expected stock builds. The benchmark contract jumped +5.72% w/w and settled at 4.341 on Friday. Apart from the dramatic change in broad market sentiment, investors speculate the rapid rise in cooling demand and potential production disruption by hurricanes may slow down storage injections.

The US Energy Department reported that gas storage soared +104 bcf to 2269 bcf in the week ended May 21, slightly higher consensus of a +100 bcf increase but narrowed the surplus to the 5- year average to 16.3% from 16.6% in the prior week. Baker Hughes reported that the number of gas rigs slid -2 units to 967 in the week ended May 28.

The National Oceanic and Atmospheric Administration (NOAA) said that the hurricane season (June 1 to November 30) in the Atlantic in 2010 has an 85% probability of being above normal, with 3 to 7 major Category 3 hurricanes.

The US energy Department, based on NOAA's forecast of 1 to 3 major hurricanes in 2009, estimated production cuts of around 4.5 mmb of crude oil and 36 bcf of natural gas production in the Gulf of Mexico. Extrapolating the figures, crude and natural gas production may be reduced by 10-11 mmb and 90 bcf respectively, during the hurricane season this year.

Precious Metals

Gold moved steadily higher after finding support at 1166 on May 21. Settling as 1212.2, the benchmark Comex contract recovered +3.07% of the -4.21% decline in the prior week. In May, gold futures record an all time-high at 1249.7 and eventually gained +2.67%.

Demand for gold moderated last week as market panic stabilized and investors began to seek riskier assets. Although concerns over sovereign crisis in the Eurozone eased temporarily, its future developments and impact on global economy are still uncertain. Current sentiment is fragile and any bad news can cause selloff in the financial market. Therefore, investment demand for the yellow metal as a safe haven should remain resilient in coming months. Together with political tension on the Korean peninsula, risk is to the upside for gold.

OECD's optimism on global economic outlook did not only boost energies but also lifted silver and PGM prices.

Comex silver recaptured the 18-dollar level Wednesday and settled at 18.42 Friday. The contract soared +4.37% last week but remained down -1.16% in May. GFMS said silver price may outperform gold price this year as driven by economic growth. 'Silver's demand is a function of the economy, not of the price... Industrial demand has come back quite strongly this year from a low level'.

On the supply side, mine production is expected to increase further in 2010. However, this will be partly offset by further decline in scrap supply and stagnant government sales. On net, silver supply is expected to rise marginally this year. Whether the surplus will be absorbed depends on investment demand which exceeded jewelry usage for the first time since at least 1985. Investment demand, including in bars and coins, jumped +90% last year to 215.6M oz.

PGMs also recorded lucrative gains last week, after massive selloffs over the past 2 weeks, with platinum and palladium rising +3.21% and +5.46%, respectively. PGM prices may retreat next week as auto sales data from China and Europe may disappoint.

Base Metals

Base metals were in a consolidative mode amid uncertainty over Chinese tightening to contain property bubbles and curb inflation. Prices were generally lower earlier in the week but rebounded later as market sentiment recovered. Zinc, tin and copper managed to record weekly gains while aluminum dropped slightly. Nickel price was unchanged. The LMEX index edged higher, by +0.82%.

We are cautious in the base metals' outlook in the second half. While the Chinese government will likely delay tightening measures such as interest rate hike, RMB appreciation and introduction of property tax amid concerns over European sovereign crisis, the path of monetary policy is going to be tight rather than loose. This will sooner or later have impacts on demand for base metals.