Commodities slipped earlier in the week as concerns over the sovereign debt crisis re-emerged. Investors worried about the Spanish budget plan and whether the debt-ridden would request for financial assistance as sovereign debt yields soared. Market reaction was positive after the announcement. Spain announced to lower 40B euro spending in 2013, including a -8.9% reduction in government ministry and a drop of infrastructure spending from -1.3% of GDP to -0.89%. As the overall fiscal adjustment is focused on reduction in spending instead of tax increases, tax measures account for around 15B euro, or 38%, of adjustment measures scheduled by end-2013. Moreover, the government would take 6 months to carry out structural reforms including the liberalization of the labor market, energy sector and telecommunications. The government also confirmed that the deficit targets are 6.3% of GDP this year and 4.5% next year, down from 8.9% in 2011. Meanwhile, the market also concerned about the deteriorating situation in Greece which will need to add further tightening measures to meet its fiscal target. While not yet disclosed publicly, it’s expected that the package would worth of around 13.5B euro, consisting of 10.5B euro in spending cuts and 2.9B euro tax hikes. The plan is expected to be announced on October 1.
The ECB, the BOE and the RBA will hold monetary decision meetings next week. While all of them are expected leave their policy stances unchanged in October, further easing would be carried out before the year end.
Crude Oil: Crude oil earlier in the week continued the correction in the prior week and drifted lower. Prices, however, recovered as the Spanish 2013 Budget was well received. The front-month contract for WTI crude oil initially fell below 90, the first time in more than a month, before ending the week at 92.19, down -0.75%, while the Brent crude contract managed to add +0.87% during the week. The relative outperformance of the latter was driven by the physical market. Operation in Buzzard in the North Sea is expected to delay until October 15 or later while oil cargoes at Forties will probably be delayed further. It’s reported that a 6th October Forties cargo has been delayed and more delays are likely. These have also helped widened the WTI-Brent spread to over US$ 20/bbl.
Natural Gas: The DOE/EIA reported that natural gas inventory rose +80 bcf to 3 576 bcf in the week ended September 21. Stocks were +296 bcf higher than the same period last year and +282 bcf above the 5-year average of 3 294 bcf. Separately, Baker Hughes reported that the number of gas rigs slipped -19 units to 435 in the week ended September 27. Oil rigs increased +8 units to 1 410 and miscellaneous rigs stayed unchanged at 3 units and the total number of rigs slid -11 units to 1 848. Directionally oriented combined oil, gas, and miscellaneous rigs slipped -10 units to 192 units while horizontal rigs decreased -7 units to 1 142 and vertical rigs added +6 units to 514 during the week.
Precious Metals: the complex retreated during the week with the exception of palladium. Yet, we believe that gold will still be the biggest beneficiary under the central bank easing environment. Weakening of the US dollar after announcement of QE3, talks of inflation and currency debasement are factors to send the yellow metal higher.
After a brief rebound last week, the gold-to-silver ratio resumed the decline last week. Indeed, Silver has performed the best in the complex so far this year. Until last, the white metal has gained +23.9%, compared with platinum’s 18.4%, gold’s +13.2% and palladium’s drop of -2.78%. The latest dataset from China suggested that silver’s demand has improved. Remaining a net importer, imports fell just -3% y/y to 304 metric tons while exports fell about -10% y/y to 61.5 metric tons. However, overall industrial demand remains weak as the semiconductor billings data signaled that shipments in Europe and US despite recovery in China and Japan.
Going forward, further rise in silver would continue to be driven by ETF demand. Indeed, the following shows that holding of iShare silver fund, the largest silver ETF, has recovered to the higher level in a year. Concerns over inflation and currency debasement have driven capitals to the white metal as a cheaper alternative of gold.
Oil and Gold Reports contributed by Oil N' Gold