China Hope Waned As Demand Worries Haunt

ONG Focus - Insights

Written by Oil N' Gold | Tue Nov 11 08 06:44 ET

More than erasing the 2.2% rise yesterday, oil price plunged as IEA may cut its 2009 oil demand forecast. The benchmark index fell to as low as 60.29 in Asian session. Although China's announcement a $586B plan Sunday drove up stock and commodity markets, investors soon realized it will not turnaround the recessionary situation in short term. The worst thing of all is that none of us has any clues on the depth and extent of the financial crisis we are facing. IEA, the Paris-based agency, will publish its monthly report on Nov 13, it's estimated the agency would trim global demand for oil by 0.8% or 700000 barrels a day amid slow economic growth. Weekly inventory report by US Energy Department will be released on Nov 12. Analysts expected crude oil stockpiles increased 0.5 mmb in the week ended Nov. 7 from 311.9 million the week while gasoline and distillate are expected to add 0.5 mmb and 1.1 mmb as inventory, respectively. Today, stock markets retreated on concerns that corporate earning result will be disappointing. The MSCI Asia Pacific Index fell 3.4% to 87.2 with Japan's Nikkei 225 Stock Average dropping 3% to 8808.50 and Australia's S&P/ASX 200 Index losing 3.6%. In European morning, stocks opened lower with major indices dropped more than 2% It's clear that market focus has been all on the demand side. Although there is some news about shrinking oil supply, we do not see they are going to help oil price. MEND, the most powerful militant group in Nigeria, threatened another oil war in Southern Nigeria Monday after the 6-day attack in September. The assault from MEND did cause shortage in oil and its attack cur Nigeria's oil output by 20% since2006. On the other hand, OPEC members continued to voice out their plans to cut production. After Saudi Arabia announced a 5% cut in December export to Asian countries, Gholam Hossein Nozari, Iran's oil minister, said that the cartel might meet earlier than December 17 to discuss about production cut again. However, these were not taken as positive factors as demand decelerated far more seriously. It's actually a dilemma for the OPEC members to decide on a reduction in output as most of them rely on the sales of oil. For instance, oil revenues account for some 90% of Venezuela's export earnings, more than 50% of the government's budget revenues and around 30% of GDP. Ecuador, currently producing 493 000 barrels of oil a day and oil exports represented 40 % of its national budget, would request for an exception on the cut or would consider leaving OPEC, if there's a second round or production cut. Gold price retreated after faltering below 778.3 (yesterday's high at 768.9). Continued to trade within a 'triangle' from 778.3 to 717.1, the precious metal for December delivery fell to 744.2 in European morning. While it's yet to confirm which way gold will go, if price fell below 717.1, rebound from 681 would have completed and a re-test is this low would be seen. In case of an upward breakout, recent rebound would extend gain to 814.4 but only a break of 822.5 (previous support-turned-resistance) would signal that recent fall may have ended. Germany and the Euro zone released better-than-expected ZEW confidence for November at -53.5 and -54 (vs -63 and -60.5), respectively. These were likely driven by rate cuts and rescue measures previously announced. Although Euro rose slightly against the dollar, gold did not reacted much albeit the increased correlation between gold price and Euro to 0.6 from 0.53. We think it's because gold has been categorized as 'commodity' and has been closely tracking oil price which performed poorly during economic slowdowns.