Second Round Of The Battle - GREED Wins

Oil price extended yesterday's rebound and reached as high as 84.53. Currently trading at 83.4, the benchmark contract has risen by $5.7/bbl, or 7.3% from 13-month low at 77.7 made Friday. We viewed this as a corrective move and upside should be limited to 90.51 and yield resumption of major decline from 147.27 again.

The black gold's rebound is inline with the sharp rally in the stock markets after various bailout plans calmed investors. In Asian session, Nikkei 225 index, reopened after public holiday Monday, rose 14.2% to settle at 9447.57. S&P/ASX 200 index gained another 3.7% today. In European morning, FTSE 100 was up by 5.21% while DAX rose by 4.75%.

On Monday night, the US said they planned to spend an initial $250 billion of a $700 billion bailout to buy stock in private banks, industry and government officials. The market is awaiting President George W. Bush's detailed announcement later today. At the same time, European governments were putting up about $2 trillion to safeguard their own banks.

Despite all these, we still think rallies seen these 2 days are not sustainable as they are just sentiment-plays and perhaps the markets were sold off too seriously last week. It's too early to say demand for commodities is coming back.

On Wednesday, EIA will report petroleum inventory for the week of Oct 10. It's expected oil and gasoline inventories has rose last week as production increased and refineries opened units that were shut last month because of Hurricanes Gustav and Ike.

According to Bloomberg survey, crude oil stockpiles probably increased 2.6 mmb 302.6 mmb. Utilization rate for refinery facilities is expected to be increased by 2.9% to 83.8%. Forecasts for gasoline and distillate stockpiles were gains of 3 mmb abd 0.5 mmb, respectively.

Increase in inventory is an indication of declining demand, which may cause a retreat in oil price.

Goldman Sachs further reduced its estimates on oil price for 2008 and 2009, after considering the exacerbated global economy. In accordance with the reduced economic forecasts of 3% for 2009 (from 3.7%), the bank expected oil price will decline to $70/bbl by the end of 2008 ($45 downward adjustment from previous forecast) and $107/bbl in 2009 ($18 lower than previous forecast).

Gold's performance has again disappointed us. Although the precious metal has risen by more than $10 by European morning, price is still lower than Friday close at 859. This indicated gold has underperformed oil and broad markets. We believe gold will continue trading within broad range of 822.5 and 936.6 these few days. On the upside, only a firm break of the upper boundary would signal recent consolidation has completed and price will head for 989.6/1033.9. In case the lower boundary is broken, the precious metal will dip further until support is found in 739.8.

Investors started to recover from the pessimistic sentiment they had in the past few weeks. This is good for stock markets but bad for gold. It's because investors would seek higher return from riskier equity markets and gold's luster as safe-haven has dimmed.

Marc Faber, the well-respected 'Doctor Doom', expected markets to recover from now to next March. During this period, interest in stock markets would outweigh gold.