The Cuts, Be It Production Or Rate, Are Ruining Commodities

Oil price tumbled yesterday as petroleum inventory increased more than expected, indicating demand was seriously dragged down by slow economic growth. The December contract for WTI crude oil once slipped by $5.98/bbl to as low as 66.2 before closing at low end of 66.75. Today, the black gold traded marginally higher due to oversold condition and rumors that OPEC will cut production by 2M bpd in the meeting held tomorrow.

Having fallen by more than 50% from the peak at 147.27 formed in July, oil's outlook remained bearish as more and more evidence, such as GDP growth, collapse of financial institutions and failure of rescue plans in restoring confidence, showed that world economy is worsening in a pace faster than we had expected. Recently, more and more analysts forecast price to weaken to as low as $50.

Stock market continued to decline in Asia and Europe. Asian stocks slumped with MSCI AP Index lost 2.8% to 85.33, the lowest level since 2004. Kospi, benchmark index for Korean stocks, fell 7.48% despite the Government's US$130B plan to guarantee banks and provide liquidity to the financial system. In European morning, all major indices traded lower with FTSE -1.64%, CAC -2.52% and DAX -3.02%. UK's economic condition worried the market. Mervyn King, Bank of England Governor, said yesterday that the UK has entered the worst banking crisis since World War II and the Government will have to adopt policies to prevent inflation from falling too much.

EIA reported inventory data for oil as of Oct 18. Crude stocks were up 3.2 M bbls last week, while Reuters survey forecast a build of 2.6M bbls. Gasoline stocks rose 2.7 M bbls, similar to forecast for a 2.8 M bbls build. Distillate stocks rose 2.2 M bbls, higher than 100,000 bbls build expected. US fuel demand during the past four weeks was down 8.5% from a year ago while gasoline demand averaged 8.8 M bbls a day in the past four weeks, down 4.3% from the same period last year.

The 'good' news of OPEC's production should have been priced in last week. As we mentioned in articles before, it's not necessary for price to rise after a production cut. In fact, in the situation we are currently facing, a cut merely reflect we are oversupplied and demand is shrinking very fast. While it's obvious that developed countries are in recession , emerging markets are slowing down too. China's GDP growth was 9% in Q3, the slowest pace in 5 years. On Monday, central bank of India unexpectedly lowered its key repurchase rate. It's a signal that the country has to focus more on stimulating growth rather than combating inflation. Crude oil import in S. Korea reduced from to 69M bbls in September from 70.3M bbls in August.

Yesterday, gold price sank to 720, the lowest level in a year, before settling at 739.8. Today, the selloff continued to the precious metal for December delivery fell another 3.3% to 715.6 in European morning. As the important support at 739.8 has broken, decline thereafter is expected to be severe. Next support can be found at 686.6.

Gold's weakness was brought about by USD strength as well as oil's slump, making the metal lose the use as inflation hedge.

Euro and pound have lost grounds against the greenback for several days. Trading at 1.2823 and 1.6222, investors sold down the currencies as they expected economic conditions in European countries are even worse than that in the US and rate cuts will be faster and more aggressive.

Despite the difficult environment, many still have confidence on gold. Central banks have been selling less gold this year. Net sales by central banks may fall by about 46% to 269 tons in 2008 from 501 tons a year ago. Industry experts believed that gold should outperform in the longer term.