Profit-taking was seen last week after the market digested the Fed’s QE3 announcement and the ECB’s new plan to buy bonds. In the commodity sector, the outperformer was gold which stayed firmly above 1750 and managed for record gain for a 5th week. We expect the yellow metal has the potential to rise further, reaching 2000 or above next year as global central banks retain easing bias and interest rates would remain low.
Crude Oil: Crude oil prices experienced selloff last week, reversing the rally in the prior week due to excitement of the Fed’s QE3. The slump was driven by speculations over a SPR release by the US and comments from Saudi Arabia that it would raise production to bring down oil prices. While the White House may in reality not need to pump from the SPR, it keeps stating that “all options (were) on the table to deal with disruptions, if necessary” and this appeared to have threatened investors not to be too bullish over oil prices. Meanwhile, an article of Financial Times indicated that Saudi Arabia is concerned about the current high oil prices and would “like to see (Brent) oil prices back to $100 a barrel”. The Kingdom is consulting its clients about their demand and has pledged to supply more when needed. The OPEC delegates stated that “the Saudis are actively managing the market…They supplied a little less when prices dropped to $90 over the summer and they will supply more now that prices are above $115”. News reported that Saudi is pumping about 10M bpd this month, slightly up from last month.
WTI crude declined -6.17% last week, compared with Brent crude’s loss of -4.49%. The latter was somehow supported by the delay of 4 North Sea Forties crude cargoes for October. It was reported on Thursday that the October cargoes numbered F1001 and F1016 had been delayed, in addition to 2 other cargoes that were delayed due to lower-than-expected production. The F1016 cargo, scheduled to load in late October, is now planned for early November. Forties crude are part of the grades that make up the Brent crude oil benchmark.
Natural Gas: The DOE/EIA reported that natural gas inventory rose +67 bcf to 3 496 bcf in the week ended September 14. Stocks were +320 bcf higher than the same period last year and +278 bcf above the 5-year average of 3 218 bcf. Separately, Baker Hughes reported that the number of gas rigs added +6 units to 454 in the week ended September 21. Oil rigs fell -11 units to 1 402 and miscellaneous rigs stayed unchanged at 3 units and the total number of rigs slid -5 units to 1 859. Directionally oriented combined oil, gas, and miscellaneous rigs slipped -5 units to 202 units while horizontal rigs increased +16 units to 1 149 and vertical rigs dipped -16 units to 508 during the week.
Precious Metals: Gold managed to stay above 1750 and record modest gains last week although others in the complex retreated due to profit-taking after the Fed’s QE3 and the ECB’s new asset purchase program have been digested. After a period of consolidation, the yellow metal is expected to resume the uptrend and rise further. This forecast is base on the assumption that central bank easing would continue. The Fed last week initiated purchases of agency mortgage-backed securities at a rate of US$40B per month for an open-ended period. Buying would continue until the employment market has shown desirable improvement. The Fed also maintained the option to alter the 'size, pace and composition of its asset purchases' as appropriate, suggesting the purchase amounts might be adjusted depending on economic conditions. Meanwhile, operation twist will continue through the year-end. It is also mentioned in the policy statement that 'if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency MBS, undertake additional asset purchases, and employ [other policy tools] as appropriate'. The Fed also pledged to leave the policy rate at exceptionally low levels at least until mid-2015. As the US economy continued to struggle and the job market remained fragile, we believe the quantitative easing program will continue until the end of 2014 and the operation twist would be extended further. The ECB and the BOJ also implemented additional easing policies in September. We expect further measures will come as the pace of recovery in the Eurozone and Japan remained slow. Other central banks such as the BOE and the PBOC are also poised to announce accommodative policies to bolster growth. Monetary easing might result in currency debasement, weakening confidence on fiat currencies. Moreover, ultra low interest rate environment has greatly reduced costs of owning gold.
Oil and Gold Reports contributed by Oil N' Gold