Crude Oil - Commentary

Crude oil continued to decline on Thursday morning, extending the falls seen on Wednesday afternoon after the weekly inventory report from the US government showed an unexpected rise in stockpiles. Crude oil supplies rose by 970,000 barrels to 358.3 million barrels in the week to 17 September, according to data from the Energy Information Administration (EIA). Gasoline stockpiles also increased, by 1.59 million barrels to 226.1 million barrels. Bloomberg reported that inventory levels had been expected to fall due to the eight day shutdown of the Enbridge Energy pipeline, which sends Canadian oil to the Mid-West of the United States. During the week, oil found some support from a falling US dollar, which weakened in the wake of the Federal Reserve meeting on 21 September. The Fed’s Open Market Committee had intimated that slowing inflation and sluggish growth in the world’s largest economy might require further action, expanding the record $2.3 trillion balance sheet as early as November. Weiss Research commented that ‘the inventory numbers were bigger than expected, but the dollar is the prime driver right now’, adding that ‘once this news is digested, oil will move higher along with the precious metals’. [1] On Tuesday, the private-sector American Petroleum Institute (API) said that crude inventories increased by 2.2 million barrels, confounding analyst expectations of a fall of 1.5 million barrels. The increase in supply arising from the slowing US economy stands in sharp contrast to robust consumption levels in emerging markets, with Chinese demand for oil expanding by 7.6% in August. Barclays Capital caught the mood of the times as it observed that ‘despite the cautious outlook on oil demand still often expressed in market sentiment, the actual flow of data continues to point to extremely robust global demand indications’.

Copper - Commentary

December high-grade copper futures traded at $3.586 per pound on Thursday morning, representing a 2.85% gain on the week. The industrial metal rallied to a five-month high of $3.5905 on Wednesday following a slide in the US dollar. This was instigated by the Federal Reserve, which on Tuesday evening confirmed that it stood ready to inject another round of stimulus to reinvigorate growth. The spectre of further QE consequently weighed on the US dollar, which in turn made metals appear intrinsically cheaper in foreign currency terms. Tight global copper supplies and resilient demand for copper from emerging markets have also supported the metal’s ascent. Trade data released earlier this week showed that China’s annual consumption of refined copper rose by almost a quarter in August, thanks to a surge in imports. Meanwhile, a separate report by the International Copper Study Group showed that world refined copper consumption surpassed production by 281,000 tonnes between January and June this year. This compares with a deficit of 125,000 tonnes in the same period a year ago. Copper output at the world’s largest mine is also poised to remain tight. The chief executive of Codelco on Wednesday said that the mine’s copper output will remain unchanged at 1.8 million tonnes in 2010 and 2011. Copper has gained 8.65% on the month and in the greater scheme of things it is probably not too unreasonable to expect a bit of a pullback, perhaps on Monday when most of the Asian market resumes trading following a three-day mid-autumn festival.

Commentary - Gold

Gold surged to an all-time high of $1,296.50 per troy ounce this week and has gained 1.3% on the week. The FOMC meeting on Tuesday served as a catalyst for higher gold prices as the precious metal came under heavy demand from investors seeking protection from a deteriorating US dollar. The Fed’s acknowledgment that inflation is ‘somewhat below’ levels deemed consistent with their mandate was taken as a hint that further Quantitative Easing (QE) was on the agenda. These comments saw the US dollar plunge this week. As confidence in paper based fiat currency begins to fade, demand for gold will increase as investors seek an asset that will retain its value during times of uncertainty. This demand will not only come from US investors fearing a drop in the dollar, but also Japanese investors worried about further currency intervention from the Bank of Japan, as well as UK investors who are seeing sterling decline amidst buoyant inflationary conditions. The additional uncertainty surrounding the US mid-term elections is likely to support gold as well in the short-term, while physical demand for the metal is traditionally high this time of year due to festive activities in India. It is difficult to see what may break gold’s remarkable momentum in the near term. The possibility of a prolonged equity market rally and greater clarity in the global economic recovery could see investors lock in gains in gold to seek higher yielding assets. In my view, however, this seems unlikely to happen in the current environment. Furthermore, gold is currently still well below the nominal high of $873 an ounce reached in 1980 - in inflation-adjusted terms this would equate to $2,312.94 today.