Weekly Fundamentals - Brent Slipped as US Plans Release of SPR

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For the past week, bad economic data released in major economies surprisingly sent financial markets higher. While such reaction appeared peculiar, this was driven by market expectations of further stimulus from central banks. Investors largely believed that disappointing economic data would add pressure to policymakers so that they would feel the urgency of adding (unconventional) monetary easing measures.

For the last week, crude oil prices firmed for most of the week with potential shortage in North Sea supply and intensified geopolitical tensions being the major driving forces. The new front-month Brent crude (October) contract, after the expiry of the September contract on Thursday, retreated after news that the US would consider release of oil from the Strategic Petroleum Reserve (SPR).

Gold continued consolidating around 1600 last week. The lack of momentum was due to the Lack of action from the Fed and/or ECB regarding further easing. PGMs soared on Thursday and Friday, after trading at lowest levels in the year for several months. Violence in Lonmin's South African mines has caused death of over 30 miners. Investors were concerned about production disruption in the region.

Crude Oil: Crude oil prices remained strong with both benchmarks soaring to the highest levels in 3 months. Brent crude oil prices rose further last week with the September contract expiring at $116.9/bbl, the highest close since early May. Closing at 94.63/bbl in euro terms, price is less than 2 euro below the all time high of 96.48/bbl euro. October Brent, however, erased gains on Friday amid news that the White House might release strategic oil stocks. Recent factors driving oil prices remained intact. 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.

Geopolitical tensions in the Middle East also sent prices higher. Saudi Aramco, Saudi Arabia's national oil company, has been hit by a cyber attack. The company stated that "on Wednesday, August 15, 2012, an official at Saudi Aramco confirmed that the company has isolated all its electronic systems from outside access as an early precautionary measure that was taken following a sudden disruption that affected some of the sectors of its electronic network...The disruption was suspected to be the result of a virus that had infected personal workstations without affecting the primary components of the network". Although the attack would have not much impact on the company's oil production, investors are going to pay close to the incident as geopolitical tensions loom in the region.

Natural Gas: According to the DOE/EIA, natural gas storage increased +20 bcf to 3261 bcf in the week ended August 10. Stocks were +442 bcf higher than the same period last year and +363 bcf above the 5-year average of 2 898 bcf. Separately, Baker Hughes reported that the number of gas rigs dropped -11 units to 484 in the week ended August 16. Oil rigs fell -7 units to 1 425 and miscellaneous rigs climbed +1 unit to 5 and the total number of rigs was down -17 units to 1 914 units. Directionally oriented combined oil, gas, and miscellaneous rigs added +2 units to 229 units while horizontal rigs decreased -8 units to 1 153 and vertical rigs slid -11 units to 532 during the week.

Precious Metals: At the latest report from the World Gold Council, demand for gold fell to 999 metric tons in 2Q12, down more than -7% from the same period last year and -10% from the first quarter. During the second quarter, gold price moved largest sideways within the range of 1500 and 1700. The lack of direction in price sent mixed signals to investment, leading to mildly net outflow of ETF and similar investment during the period. Geographically, China and India remained the largest consumer of the metal, accounting for 45% of jewelry and bar and coin demand. China, currently the world's largest gold consumer, recorded a +6% gain in demand for jewelry and bar and coin, while India's consumption fell -33% during the period. The key reason for the drop in Indian demand was mainly weakness in rupee against the US dollar. Note that while India's consumption plunged one-third in terms of quantity, the decline was only -19% in terms of value. Although the contraction in gold demand was broadly based, official purchases were particularly strong, rising +138% annually and +63% quarterly. As we mentioned in previous articles, a number of central banks, especially those from emerging markets, have been adding gold to their reserves so as to diversify away from holdings of the US dollar. For instance, the National Bank of Kazakhstan announced in July that it would increase its gold purchases to 26 metric tons from 24.5 metric tons this year, targeting to raise its gold holdings to 15% of the foreign exchange reserve. During the second quarter, the country added +5.4 metric tons in its reserve. The Russian central bank also bought 22.3 metric tons of gold during the second quarter with the amount of gold staying at 9% of total reserve. Few central banks sold their gold holdings in the second quarter. The only exception was Germany which disposed -0.7 metric tons of the yellow metal. This does not mean that European central banks are beginning to sell gold. The reverse is true if we take a look at the report of the Third Central Bank Gold Agreement (CBGA3). Total gold sales by European central banks were so far only 5.9 tons in the third year (September 27, 2011-September 26, 2012) of the agreement, down markedly from 53.3 metric tons in the previous year. Sales limit agreed on in CBGA 3 were 400 metric tons.

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