WTI crude oil continues to trade below 50 in European session. Although we have been saying that upside for oil price is limited due to weak fundamentals, decline these 2 days was brought by reversal in market sentiment. The black gold's recent rally was driven by improved confidence that global economy will recover in 2H09 but the outbreak of swine in Mexico may potentially delay it.

In our opinion, the negative impact from the flu on oil price may not be as serious as the market anticipated. As many investors compare the current situation with the SARS in 2002, we would like to look back and see what had happened at that time.

Although the first case of respiratory disease was reported in China in late 2002, SARS did not turn into a pandemic in Asia until early 2003 while economies in China, Hong Kong and Taiwan did not get the most serious hit until 2Q03.

Oil demand was affected because air traffic was paralyzed (affected jet fuel demand) and economic activities in the above-mentioned countries reduced turbulently. In 2Q03, global passenger air traffic dropped -8.2% yoy while in Asia alone, it plunged over -19%. During the period, oil demand gained merely +3% yoy, compared with 10% growth in previous quarters. Oil consumption in Hong Kong plummeted -13.5% yoy while change in OECD countries was not much affected.

An inference we can draw from the SARS case is that oil demand should decline the most in countries where infection is the most serious. Although WHO has raised the global pandemic alert the highest level, we believe Mexico is still be the most critical place. According to IEA, oil demand from Mexico will reach 2M bpd in 2009. A -13.5% decline translate into a 0.27M bpd drop, a figure not so significant compared with global oil demand of 83.43M bpd.

Gold price attempts to test 900 again after retreating to 885.7 earlier. Although we continue to believe the precious metal will outperform in the long-run as global low interest rate environment and depreciation in the dollar (due to aggressive stimulus policies by the US government) are positive factors, investors' flocks to USD in the near-term for safe-haven do impose threat to gold's outlook. If the dollar does not weaken, it looks expensive for gold price in real term, even at the current level.

Investment demand remains bleak. Bullion holdings in the SPDR Gold Trust stayed at 1104.45 metric tons, unchanged for 3rd consecutive day.