Oil Rises on QE Hopes while Gold Tumbles on Profit Taking

In the commodity sector, oil prices strengthened as led by stock markets and decline in crude inventory in the US. The front-month contract for WTI crude oil rose for a third consecutive day to a 3-day high of 86.39 before settling at 85.44, +1.21% while the equivalent Brent crude contract soared above 110 for the first time in 3 days and closed at 109.3, up +0.88%. Gold slumped on profit-taking yesterday after rising to a record high of 1917.9. The benchmark Comex contract tumbled to as low as 1826 before ending the day at 1861.3, down -1.62%. After months' of relentless rally, the yellow metal's exponential gains have sent price to elevated levels. Some market participated worried that gold is forming a bubble and a sharp correction will follow.

Hopes of Fed's QE3 boosted market sentiment and sent equities higher yesterday. This shrugged off a 5.8 magnitude earthquake on the eastern seaboard in the US. Wall Street rallied with DJIA and S&P 500 gaining +2.97% and +3.43% respectively. European bourses also added around +1% despite slowdown in manufacturing activities and deterioration in confidence. Today in Asia, financial markets were hurt after Moody's said it downgraded credit rating of Japan's debts to Aa3 from Aa2.

After warning in May about the rating downgrade, Moody's announced that it has cut the rating of Japanese debts from Aa2 to Aa3, which is 3 notches below the triple A rating, as natural disaster, nuclear crisis and changes in government 'further hamper the economy's ability to achieve a growth rate strong enough to steadily reduce the budget deficit'. The decision was announced after news that Japanese Prime Minister Naoto Kan will express his intention to resign later in the week.

On the dataflow, US new home sales missed market expectations and fell to 298K in July from a downwardly revised 300K in the prior month. Richmond Fed manufacturing index slipped -9 point to -10 in August while the ICSC-GS chain store sales index fell -1.0% w/w in the week ended August 20. From a year ago, growth eased +3.0%, the slowest pace since June 25.

The industry-sponsored American Petroleum Institute reported that crude oil inventory fell -3.34 mmb to 347.05 mmb in the week ended August 19. However, both gasoline and distillate stockpiles rose, gaining +6.37 mmb and +2.00 mmb respectively. The market expects the US DOE/EIA report will show crude stock increased +1.75 mmb, gasoline fell -1.00 mmb and distillate added +1.30 mmb.

Weekly change in inventory as of 19/08/11 Change Consensus Previous
Crude oil +1.75 mmb +4.23 mmb
Gasoline -1.00 mmb -3.51 mmb
Distillate +1.30 mmb -2.45 mmb

Comparison between API and EIA reports:

API (Aug 19) EIA (Aug 19)
Actual Inventory Previous Forecast (using API's inventory level) Inventory
Crude oil -3.34 mmb 347.05 mmb +1.75 mmb -6.93 mmb 357 mmb
Gasoline +6.37 mmb 212.21 mmb -5.37 mmb +2.13 mmb 212 mmb
Distillate +2.00 mmb 150.87 mmb -1.29 mmb -3.10 mmb 151 mmb

API collects stockpile information on a voluntary basis from operators of refineries. Data from the API and DOE have moved in the same direction 71% of the time over the past 52 weeks

Source: Bloomberg, API, EIA

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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