Back To Reality, Recession Cannot Be Voted Away

Oil price traded narrowly Thursday after losing 7% a day ago. The benchmark contract fell to as low as 63.73 in Asia as the larger-than-expected US inventory released yesterday and lower refinery margins spurred worries on oil demands. However, price recovered and is currently at 65.13 after Euro-zone released better retail sales data for September (-1.6% vs consensus of -2.2%). Oil is expected to continue range-trading within 61.3and 71.77 today.

EIA's report showed that, for the week ended Nov 1, US inventory for gasoline increased by 1.12 mmb. This surprised the market as consensus was a decreased of 0.65 mmb. At the same time, both crude and distillate stockpiles increased despite low prices. Imports dropped 0.365mmb to 9.97mmb a day.

As the profit from making gasoline in the US was at -5.04/bbl and has been negative since mid-Sep, investors worried that decline in refinery margins would refrain refiners from processing oil, thus reducing demand for oil. Merrill Lynch lowered its forecast for the complex margin for refiners in Singapore for 2009 and 2010 by 20% to 7.20/bbl and 9% to 7/bbl, respectively. At the same time, the bank estimated oil demand in Asian countries would only grow 300 000 bbls a day as China, India and countries nearby reduce travel and consumption of diesel and gasoline.

Following slumps US markets yesterday, Asian shares snapped 3-day gains as renewed concerns on corporate earning outlooks triggered selling. The MSCI Asia Pacific Index plunged 6.1% to 88.59. Nikkei 225 stock average was down 6.5% while the Korea's KOSPI and Hong Kong's Hang Seng Index slid 7.6% and 7.1%, respectively. Toyota, the world's second largest automaker, revised downward its profit forecast by 56% due to the deterioration of US economy. After election, investors realized that there's a long way to go in this recession journey.

In European morning, all major indices lost grounds for the second day with FTSE down 3.3%, CAC down 3.46% and DAX down 3.27%.

Gold traded sideways today with merely $10 fluctuation. Currently trading at 741.5, investors for gold futures are waiting for ECB and BOE rate decisions as correlation between gold and Euro has strengthened to 0.6 this year from 0.53. Rate cut would put further downside pressure on Euro against the greenback.

Euro fell against the dollar and the yen as it is expected ECB would lower interest rates today to rescue economy. Sterling also weakened amid speculation that Bank of England will cut borrowing costs. While economists forecast both central banks would trim interest rates by 50 bps, it's likely that the cut would be higher.

Moreover, the market is also awaiting US non-farm payroll to be released tomorrow. Economists expected payrolls dropped by 200 000 and unemployment increased to 6.3% in October. If that's the case, this would be the worst in 5 years. Any figures higher than forecasts would be negative for the dollar and may help gold rebound in short term.