Disappointing Chinese trade data and downgrade of IEA's oil demand forecasts triggered retreat in oil prices on Friday, despite gains were restored on weekly basis. China's trade surplus narrowed sharply to $25.15B in July from $31.72B a month ago. Export growth declined to +1.0% y/y, compared with +11.3% in June, reflecting weakness in global economic activities. Deterioration of the sovereign debt crisis in the Eurozone and the economic slowdown in the US hurt China's export demand in July. Import growth also dropped to +4.7% y/y from +6.3% in June.
After the DOE/EIA, the IEA also released its monthly forecasts of oil demand. The agency reduced its estimate of 2012 world consumption by -250K bpd to 89.6M bpd and the 2013 estimate by -400K bpd to 90.5M bpd. The downward revisions were driven by the downward revisions in global GDP growth forecast (down from +3.6% to +3.8% for 2013).
Crude Oil: Crude oil prices gained for a second consecutive week as investors temporarily ignored the ongoing sovereign debt crisis in the Eurozone and focused on underlying fundamentals. During the week, the front-month WTI contract added +1.61% while the equivalent Brent contract soared +3.68%. While the spread between Brent and WTI crude widened last week to a level not seen since May 2012, the time-spread of the former also became increasingly "backwarded". The key reasons for the strength in Brent crude oil prices remained North Sea supply shortage and growing instability in the Middle East, especially Iran's supply disruption and the turmoil in Syria.
Despite the IEA's downward revision in global oil demand, lower consumption outlook is offset by tightening in supply. As we mentioned in the previous weekly report, production of Forties, the largest North Sea Stream, will face disruption due to extended maintenance of the Buzzard field. Production of the field will be suspended from early September until mid- October.
Meanwhile, the geopolitical situation in the Middle East is getting more unstable. Violence in Iraq, attacks on pipelines in Turkey, turbulence in Syria as well as intensification of sanctions over Iran have raised concerns over output shortage from these countries. Note that sanctions from the US and European oil embargo against Iran have turned out to be more "successful" than expected. Due to the embargo started in July 1, Iran's oil production has plummeted to the lowest level in 22 years. Crude production July plunged to 2.9M bpd from 3.4M bpd in the beginning of the year and 3.6M bpd in 2011. According to the IEA, Iran's oil production will decline further to 2.6M bpd by year-end.
Unconventional monetary easing by the Fed and the ECB might provide further supports to oil prices in coming months. Commodity prices have benefited from QE measures by central banks in the past. We look for another round of price hike in September should the Fed and/or the ECB announce additional asset purchase programs.
Natural Gas: Nymex gas price tumbled Friday, sending the benchmark contract -3.72% lower during the week. Mild weather forecast is the key reason for the decline. According to the DOE/EIA, natural gas stock increased +24 bcf to 3241 bcf in the week ended August 3. Stocks were +465 bcf higher than the same period last year and 386 bcf above the 5-year average of 2855 bcf.
Separately, Baker Hughes reported that the number of gas rigs dropped -3 units to 495 in the week ended August 10. Oil rigs added +3 units to 1 432 and miscellaneous rigs climbed +1 unit to 4 and the total number of rigs was up +1 unit to 1 931 units. Directionally oriented combined oil, gas, and miscellaneous rigs fell -1 unit to 227 units while horizontal rigs increased +6 units to 1 161 and vertical rigs slid -4 units to 543 during the week.
Precious Metals: Gold prices continued to struggle trading above 1600. There lacks new catalysts to send the yellow metal higher in the near-term as both the Fed and the ECB refrained from announcing new quantitative easing measures. We expect gold would gain further traction if central banks add new stimuli. However, if central banks choose to remain silent, gold's floor would need supports from physical demand which does not seems to bright in coming months. Festival season in India starts in October. During main festivals such as Navaratri, Diwali and Dussehra, demand for gold is expected to soar. However, the rise in gold purchases this year may not be as strong as previously due to concerns over the monsoon and continued weakness in the Indian rupee.