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Energy Complex In Broad−based Decline On Huge Stock Builds And OPEC's Rising Output

Thu, Jul 2 2009, 04:45 GMT
by Oil N' Gold Team

Oil N' Gold

Energy prices fell after the inventory report showed that refinery product builds came in more than expected. Although refinery rates was still high at 87.1%, fuel demand over the past 4 weak was down -5.8% on annual basis. Moreover, decline in margin suggested crude demand will fall going forward. The benchmark contract for crude oil slid -0.8% to close at 69.31 while that for RBOB gasoline, heating oil and natural gas plunges -2.3%, -1.2% and -1%, respectively. In Asian session today, the black gold trades narrowly with mild downside bias.

Although some OPEC members commented explicitly there's no need to increase production given ample oil supplies, surveys showed that the cartel's oil output rose for a third month in June. Oil production was estimated to have increased to 28.23M bpd during the month from 28.18 in May while OPEC-11 (those with quotas) pumped 25.86M bpd, 1.015M bpd higher than what targeted. Among them only Saudi Arabia, Kuwait and Qatar produced less than their targets despite the increase. In Nigeria, the production last month plunged 40K bpd to 1.785M bpd due to suspension in some production lines upon MEND's attacks. However, this remained above its target.

Gold price surged +1.5% to settle at 941.3 yesterday. Others in the precious metal complex also rose with silver, platinum and palladium jumping +1.2%, +1.7% and +1.6%. The main reason for the rallies was weakness in the dollar after news said that the Chinese Government will request discussions about a new global reserve currency to replace USD at the G-8 meeting next week. Since the US aggressively expands its balance sheet so as to provide liquidity to the market, countries holding huge USD-denominated debts, especially China and Russia, have from time to time questioned about the stability of the dollar.

In March, the Governor of People's Bank of China suggested the IMF should be responsible for establishing a new reserve currency based on the special drawing rights. In the annual report released by the central bank last week, similar call was restated. In early June, Medvedev, Russia's President, expressed his intention to push for the creation of a 'supranational currency' to replace USD. At a meeting with other central Asian countries, Medvedev said that 'there can be no successful global currency system if the financial instruments that are used are denominated in only one currency ... today this is the case and the currency is the dollar'.

Today, something dramatic happened. A Chinese official clarified that he was 'not aware' of a plan to discuss a new currency in the upcoming G8 meeting. Moreover, the Vice foreign minister in China said that he hopes USD will remain stable, hinting the nation does not want USD's status to be changed.

USD rebounds after the comments and rises from a 3-week low of 1.4196 against the euro. The next thing affecting near-term outlook of the dollar is ECB meeting later today. Although it's widely expected that policymakers will keep the main refinancing rate unchanged at 1%, the central bank's forecast on economy as well as details on the covered bond buying program are the focuses. Last week, the ECB allotted 442.2B euro in the first 12-month open market operations as well as 6.4B euro in the 3-month operations. The act aroused speculations that the central bank plans to shift its attention to monitoring long-term, instead of short-term, interest rates.

The US Labor Department will release employment report for June. The market anticipated unemployment rate rose to 9.6% in June from 9.4% a month ago. Furthermore, non-farm payrolls probably fell -375K after falling -345K in May. Any less-than-expected decline in employment will stimulate risk appetite and pressure dollar. Gold, which has inverse correlation with USD and temporarily broken link with safe-haven asset, will gain.

Published on  Thu, Jul 2 2009, 04:46 GMT