Oil price recovered after falling to 8-month low at 86.05 (November futures) Thursday morning. We view this as a short-term rebound due to loss of momentum rather than improvement in fundamentals or change in market sentiment. Price should hold below 93.2 and yield resumption of recent decline.
Events that happened in recent weeks reinforced how poor the economic outlook is. From Lehman Brother's collapse to nationalization of Fortis, we realized that recession has spread from the US to Europe. From the $700B bailout plan in US to announcement by European governments on unlimited guarantee to private bank deposits, we have got solid proof that credits have been frozen and worldwide liquidities have been dried up. From the Fed's order of rate cut by 50 bps last night to echoing actions in ECB, BOE, PBOC, Bank of Korea......, we can no longer hide but to admit that our economy is sliding into recession.
Although rate cut caused decline in USD, the catalyst was eclipsed by persisting worries on demand. Yesterday's inventory report indicated such concerns materialized. EIA announced that crude inventory for the week of Oct 1 increased significantly by 8 mmb, compared with market expectation of 2 mmb. For gasoline, the build of 7.2 mmb also exceed market forecast of 1 mmb. Although distillate stockpile fell last week, the less than 1mmb draw was lower than 1mmb reduction as expected by the analysts.
The only news support oil price remains the comments by OPEC members. Venezuelan President Hugo Chavez said Wednesday that some members of the cartel want an extraordinary meeting before the group's Dec. 17 meeting in Algeria. Iraq's oil minister said OPEC may need to consider cutting output if the price of crude remains below $90. However, the determining factor lies on Saudis who did not view falling in oil price as a problem.
Gold retreated again after failing to break 926/932 (Yesterday's high at 924.9). Currently trading at 8894.4, as long as 880.1 holds, bullishness remains for re-test of the above-mentioned level. Break would yield further gain to 989.6 and then 1033.9.
On a fundamental basis, we are also positive on gold's outlook. South Africa, the world's second largest gold producer after China, has recorded a drop in gold output by 23.2% in August, y/y. From investment angle, the largest gold-backed ETF, New York's SPDR Gold Trust GLD, said that its holdings rose to a record 763.9 tons Wednesday. They are up almost by 25% since Lehman Brothers filed for bankruptcy protection on Sep 15.
The price drop today despite worsening economic outlook is probably due to ‘temporary' increase in risk appetite after coordinated rate cut action around the world. Investors just took profits from gold's rally and redeployed them into the oversold equity markets which experienced panic selling in the last few days.
Dollar continued to weaken after the rate cut. Currently trading at 1.3644 and 1.7282 against Euro and sterling, USD has probably formed a near-term top on Monday.
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