Oil was trading under pressure after US President Bush's warning on recession. Although briefly rebounded to 106 after plummeting to as low as 103.22, the black gold's weakness resumed after release of worse than expected home sales data. New homes sales fell by 11.5% in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991. The decline was unexpectedly as market only forecast a 1% drop. Currently trading at 104.77, it's expected that oil will continue to consolidate below 110 this week, however, as long as 101.98 holds, we can still hope for another rise.
Through a televised address, Bush said that a long and painful recession' is ahead of us if Congress does not act quickly to approve the rescue program. The President also signaled that he's willing to address lawmakers' concerns and to ensure taxpayers are protected. The speech caused dollar to fall against the Euro as traders bet the Fed will cut interest rate in the next meeting. Although price movement of USD and oil were historically negatively correlated, oil price fell with USD because investors are concerned that the weakened economy would further lower oil consumption.
These worries were exacerbated after employment data and durable goods data were released. New claims for unemployment benefit for the week ending Sep 20 rose by 32 000 to 493, 000, a 7-year high, compared to analysts' expectation of 445 000. Even after seasonal effect of hurricanes was excluded, the figure was still at high level. Orders for US-made durable goods also plunged in August. Falling by 4.5% (vs consensus of -1.6%), it was the largest drop since January.
On the supply side, over 60% of oil and natural gas production in the Gulf of Mexico is still halted after the passage of Hurricanes Gustav and Ike. Petroleos Mexicanos at the same time, reduced daily output by 250 000 bbls a day. The company said it expects production to be back to normal by the end of the week. At the same time, OPEC's oil supply will decrease this month by 800,000 bbls a day to 32.6M bbls (2.4%) because of lower exports from Saudi Arabia, Iran, Iraq and Nigeria. These oil-positive news were almost ignored by the market as economic and demand issues were in focus.
Gold price plunged by more than $20/oz at 1030 EST as dollar rose to 1.4666 against Euro from 1.4738 half an hour ago. The abrupt price change was probably due to the news that the bailout plan will get approval soon. Currently trading at 874, although some more consolidation looks inevitable, as long as 865.5 (55day EMA) holds, bullishness remains and resumption of recent rise for 989.6/1033.9 is expected.
Although both oil and gold are treated as inflation-hedge commodities and move inversely with USD price movement, their responses to the Government's rescue plan and recent economic uncertainty are quite different. Roughly speaking, oil price was weighed down by uncertainty while gold price demonstrated the safe -haven characteristic when economic turned bad. In some occasions, oil even moved in same direction as USD (i.e. fell together). One of the reasons is that, in the past, gold was accepted as a substitute of dollar. Although that's not the case now, investors tend to shed to precious metals like gold to fight against the depreciating dollar. On the other hand, it's understood that crude oil is widely used for industrial purposes. In periods of economic ebbs, oil demands would definitely suffer. Similar phenomenon can be found in silver. Silver shares both qualities of precious metals and industrial metals, which prohibited it to fully benefit from the safe-haven buy recently.
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