One Day Wonder for Oil and Gold Wiped Out By Strong Dollar

Oil price retreated to 73.77 in European opening after rising to 76.12 ($0.97 below our mentioned resistance at 77.09) yesterday. Strength of the dollar against Euro is the main reason weighing on the black gold as the 2 has correlation of as high as 0.6 out of 1.0.

USD traded at 18-month against Euro at 1.3239 after FED chairman Ben Bernanke's endorsement on another bill to stimulate US economy. Bernanke advised lawmakers to consider measures to help consumers, homebuyers, businesses and other borrowers to access credit and to promote economic growth and job creation.

Crude oil rose earlier on expectations that OPEC would reduce output significantly at an emergency meeting on Oct 24. Market expectations of production cut have been raised by 1M bpd to over 1.5M bpd after OPEC president Chakib Kehlil and Iran Minister's requests of 2M and 2-2.5M bbls, respectively. Although a trim is definite, the amount is controversial and would affect price outlook. If eventually, only a 1M cut was announced, it would definitely disappoint and cause another round of selloff of oil. Moreover, a 1M bpd reduction would be offset by a 3M bbls daily production by the cartel.

After the cut, execution is another problem as each of the cartel members has their own agenda. From different countries' responses, we see that Saudi Arabia was the one most reluctant to cut production while Iran and Venezuela were eager to do so. According to Goldman Sachs, Saudi only requires oil price to be $54/bbl to meet the budget while the Iran, Venezuela, Nigeria and Indonesia needs oil price to be at least $80 to meet the balance. On average, OPEC requires $60/bbl to balance the budget.

Stock market is mixed today with Japanese and Australian stocks respectively rose 3.34% and 3.87% while Hong Kong and Korean stocks fell by more or less 1%. Gains in stock markets were led by resources sectors and the ecstasy may dissipate when dust is settled after the OPEC meeting. In Europe, stocks continued to trade higher with CSC 40 added 2.34% and DAX also gained 1%.

Gold price, even more correlated with USD, slipped to 781.8 today. It's likely for the benchmark contract of the precious metal to close below $800/oz for the third consecutive day including today. As long as support-turned-resistance 822.5 level holds, gold's outlook remained bearish and downside to 750 and then 739.8 cannot be ruled out.

Gold's weakness was mainly due to selloff by hedge fund liquidations. Open interest in the US Gold Futures and options market shrank in the week ending on Oct 14, down by another 1.6% to its smallest size since the start of Sep 2007. Considering physical demand, I do expect some buying, especially from Indians, below $800 as the Hindu festival of Diwali is just eight days away. Demand from China still looks strong with 23% growth in September from a year ago.

Later today, Bank of Canada will discuss about interest rate. Market expects a 50 bps cut to 2% from 2.5%. A larger-than-expected reduction would further push up the dollar and hence weigh on gold.