While great volatility remained, commodities appeared to have stabilized modestly during the week. After extending the previous week's selloff on Monday, most commodities rebounded sharply on hopes that European leaders were about to deliver crucial measures to contain the sovereign debt crisis. On the macro-front, only second-tier data were released and many of them surprised to the upside. This also helped sustain the rebound in the near-term.
The focus of the week remained in the Eurozone. The annual World Bank/IMF meeting managed to push European finance ministers to work 'harder' in devising policies to restore confidence Eurozone's financial system. While leaders were divided in what means to use, the split was not as big as we previously anticipated. One example is that the lower house of the German parliament passed the new EFSF bill with a great margin. It's likely that all of the 17 Eurozone member nations will approve the plan agreed in July.
There will be several central bank meetings (RBA, BOJ, ECB and BOE) in the coming. Interesting, 2 banks, namely the RBA and the ECB, which had hiked interest rates over the past 12 months are currently facing increasing speculations of rate cuts in the upcoming meetings. We believe the RBA will adopt a wait and see mode, and leave the cash rate unchanged at 4.75%. Yet, a rate cut may be seen in November or December. The ECB will probably announce some easing measures although it is not necessarily a rate cut. The have been hopes of re-launch of the covered bond purchase program and reintroduction of the 12-month loans for the region's banks.
Crude Oil: While staying at wide level, the spread between WTI and Brent crude narrowed a tad as fears of sovereign crisis in the Eurozone and return of Libyan output damped prices of the latter. Italian oil company Eni said on Monday it has resumed oil production in the country, producing some 31.9K bpd. French company Total also said it had restarted some production last week. News reports indicated that the Al-Jurf field could produce up to 40K bpd in coming weeks. However, we are not too worried that resumption of Libyan crude production would result in oversupply. The above mentioned oil output should be benchmarked off Urals, instead of light, sweet crude benchmarked to Brent. Moreover, it takes time for a normalization of the Libya's oil market.
Key factors keeping oil on the defensive recently are concerns over global economic slowdown and heightened European debt crisis, as well as weakness in US stock markets and strength in the US dollar. These conditions will remain intact in coming months and should continue weighing on oil.
Price movement of natural gas was quite an inverse of that of crude oil. Nymex gas price rose earlier in the week but slumped on Wednesday and accelerated the fall on Thursday after the DOE/EIA reported a big increase in inventory. Gas storage jumped +111 bcf to 3 312 bcf in the week ended September 23. Stocks were -91 bcf below the same period last year and +5 bcf, or +0.2%, above the 5-year average of 3 307 bcf. It's the first time since April 2011 that gas inventory stayed above the 5-year average.
Baker Hughes reported that the number of gas rigs rose +11 units in 923 in the week ended September 30. Oil rigs fell -11 units to 1060 and miscellaneous rigs dipped -1 unit to 7, sending the total number of rigs -1 unit lower to 1 990. Directionally oriented combined oil, gas, and miscellaneous rigs fell 4 units to 238 while horizontal rigs dropped -5 units to 1135 and vertical soared +18 units to 617 during the week.
Precious Metals: Gold recorded losses for a 4th consecutive week as driven by CME's margin hike, strength in the US dollar and liquidation of long positions to cover losses in risky assets. The benchmark Comex contract plummeted below 1550 for the first time since July on Monday. Gold's outlook in the near-term is clouded. Hopes on QE3 have evaporated since the last FOMC meeting and investments for safe-haven bonds increased at the expense of gold and silver. As usual, silver experienced greater volatility than gold. While gold has corrected around -15% from the record higher of 1923.7 made 4 weeks ago, silver's decline over the period was almost -30%.
After falling to a bottom of 31/32 in later April, the gold/silver ratio has been rising and the recent selloff has sent the ratio back above 50, a level not seen since November 2010. As we mentioned in our previous articles, slowdown in advanced economies is more detrimental to precious metals with heavy industrial application (e.g.: silver and PGMs) than gold. The chart below shows that US ISM index below 50 is often accompanied with a rising gold /silver price ratio.
At the gold survey released in mid -September, GFMS forecast gold price will rise above 2000 before the end of the year. According to the consultancy, a confluence of problems: 'deterioration in prospects for the world economy over August, the maintenance of low interest rates, fears over the emergency of inflation in the industrialized world, a continuation of high levels of inflation in many emerging markets and the outbreak of conflict in MENA' created the 'perfect storm' for gold investments.
This coincides with our long-stated view that the recently correction in gold will be supported at some points (possibly 1500) and the long-term rally will resume as long as global economic uncertainty persists and/or intensifies and world central bankers leave interest rates low for an extended period.