OPEC's Same Old Trick Won't Help Much

ONG Focus - Insights

Written by Oil N' Gold | Fri Nov 14 08 06:26 ET

Crude oil found temporary support at 54.67 yesterday and rebounded by more than $3/bbl to close at 58.24. Excessive selling, rising stock markets, better-than-expected inventory report and OPEC meeting were the stimuli. However, recent data reinforced our beliefs that OECDs are entering recession and China's growth is slowing rapidly. Therefore, we continue to hold the view that the catalysts would merely provide short-term support to price and the benchmark index would resume downtrend later and fall to as low as $50. US stock markets rose by more than 6% yesterday, as investors fled to the cheap energy and real estate companies. Today, Asian markets caught up and MSCI AP Index rose 0.7% to 82.90. European shares also open higher with FTSE, CAC and DAX added 2.80%, 1.67% and 2.72% respectively. US Energy Department reported petroleum inventory data for a week ago. To analysts' surprise, crude oil inventory gain came in lower than expected at 22K bbls, whereas the market expected addition of 1M bbls. Meanwhile, distillate added 0.516M bbls and gasoline added 1.982M bbls in inventory. OPEC has moved its December meeting earlier on November 29 as the cartel could not see much impact from the last cut of 1.5M bpd in the Vienna meeting last month. Although reduced supply may make the demand/supply equation look more balanced. It also means more spare capacity which is bearish in lone term. OPEC cut normally lags demand situation. Take the period of 1998/99 as an example, from 1Q98 to 3Q99, the OPEC cut 3.2M bpd. However, price decline did not stabilize until the second quarter of 1999 and by that time, spare capacity already reached 9%. China has been showing slowdown in recent economic data. The world's fourth largest economy reported a 27.2% growth in fixed asset investments in urban areas in the first 10 months from a year ago. This was lower than the 27.6% gain from Jan to Sep, 08 and market expectation of 27.4%. Gold fell to as low as 698.2 Thursday before bargain hunting pushed price up above the 681 low. The benchmark contract rebounded to 737.1 today and we saw some profit taking thereafter. Dollar's strength remains after the dollar index rallied to 30-month higher yesterday. In European morning, USD continued to rise against the Euro and Sterling as economic data released today evidence recession in Europe. The Euro zone has just reported 3QGPD and Oct CPI data. While the former showed a slight growth of 0.7% YoY (-0.2% Qoq, 1.4% in 2Q), the latter was 3.2% YoY (flat with September). Both data were inline with consensus. Although inflation of 3.2% was the same as last month, the much lower GDP growth would make the ECB to continue to cut rate in the next meeting. This is negative for Euro. Despite near-term weakness, gold should still be attractive in longer term. News said that China will increase its gold reserve as price slumps. A gold association in China said that that nation should increase its bullion holding to diversify its reserves as the dollar may decline due to huge budget deficit as well as inflationary pressure caused by the $700B bailout plan announced earlier.