Oil N' Gold Focus: No Hope For Rapid Remedy On Recession, Oil Selloff Continues

ONG Focus - Insights

Written by Oil N' Gold | Wed Nov 12 08 07:08 ET

Decline in oil accelerated after the benchmark contract closed below $60/bbl yesterday, first time in 22 months. Outlook on oil demand is very pessimistic as companies cut investments and drivers drive less. Market sentiment is so weak that enormous stimulus packages and rate cuts are not able restore. Currently trading at 58.35 (after falling to as low as 57.7), we believe the black gold would extend further weakness to 53.69 (100% projection of 147.27 to 90.51 from 110.45 at 53.69). The ultimate reason for the decline is DEMAND. Today, Asian stocks lost ground as more corporate trimming earning guidance. The MSCI Asia Pacific Index, after the 3.6% slump Tuesday, fell another 1.4% to 85.81, the lowest close since Oct 29. Resources stocks were the main losers. Energy giants Inpex and CNOOC retreated as oil traded down. Fortescue, Australia's third-largest iron-ore producer plunged 11% after the company announced a possible drop in iron ore shipments. European shares are flat at opening. As corporate earnings are regarded as proxy for economic growth, hence oil demand, disappointing company guidance exacerbate investors' worries on demand outlook. Market expected the International Energy Agency would trim 2009 oil demand forecast for the third month. At the same time, US Energy Department would release weekly petroleum inventory tomorrow. Reflecting bearish views on oil consumption, analysts adjusted their forecasts on inventory upward. According to Bloomberg survey, analysts expected crude oil stockpiles increased 0.75 mmb in the week ended Nov 7, gasoline stockpiles increased 0.2 mmb while supplies of distillate fuel added 1 mmb. The forecasts were higher than a day ago in which analysts expected addition of 0.5 mmb in crude and gasoline stocks while increase in 1.1 for distillate inventory. Goldman Sachs commented that buildup of oil inventory during crisis caused 'contango' - price of short-term futures is less expensive than long-term futures. As oil price declined, people do not find it cost effective to use oil as they bought it, they'd rather store is for later consumption. In the long run, IEA is also positive on oil. It forecast global oil demand would rise by 1% per year through 2030 while output decline at existing fields would accelerate to 8.6% (previously 6.7%). The agency also warned of an oil crunch should there be under-investment. Gold dropped in European morning to as low as 728.1 as crude oil slumped and dollar strengthened against the pound. The benchmark contract for the precious metal is consolidating within the range from 778.3 to 717.1 in the form of a 'triangle' and a downside break would signal rebound from 681 have completed and a re-test of 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. The pound extended recent weakness and fell to as low as 1.5254, the lowest level since 2002, against the greenback, after Mervyn King, the Governor of BOE, said the nation is ready for another rate cut. On the demand side, India's import of gold plunged 30% in October in 44 tonnes due to depreciation in Rupee and lower demand in gold ETF. However, it would probably improve in November as we have already seen some buying returned in the last week of October. UBS forecast the precious metal to trade at $800/oz in one to three months' time.