Weekly Fundamental Outlook for Energies and Metals - The Rate Cut Era

October was a disastrous month for most markets. The CRB index closed at 268.39 last Friday, down from 345.50 on Sep 30. UBS AG cut its forecast for global growth for 2009 to 1.3%, from 2.2%. This then translated a reduction of more than 45% in its 2009 forecasts for many commodity prices.

November is a month for easing monetary policy. After central banks in US, Japan and China announced rate cut, ECB and BOE will meet this week. ECB is tipped to slash rates by 50 bps to 3.25%. For BOE, it's expected to cut lending rate by at least half a percentage point from 4.5%.

Crude oil

October was proved to be an ugly month for oil price performance as the NYMEX futures had its biggest fall of 32% since trading began 25 years ago. Last week, crude oil fell to 61.3, 18-month low, as investors did not believe OPEC's production cut would help oil price. However, in the middle of the week, the black gold rebounded to as high as 70.6 after rate cuts in US and China and better- than- expected oil inventory data. The market rejoiced as lower borrowing costs may stimulate economic growth and hence oil demand. However, the one day wonder was then destroyed by weak economic data such as US GDP growth for 3Q and UK consumer confidence and the black gold tumbled to 63.12 Friday before rebounding to settle as 67.81 in late session due to short-covering and Wall Street rally.

Oil demand remained the most important issue in determining medium- to long- term oil price. Without an improved outlook on economy which gives investors confidence on demand prospect, any favorable news would only present a short-term bounce for the price. We view this as good opportunity to take profit. Equity indices have been recently treated as a proxy to global economic health. Oil price has been following the ups and downs of stock markets in the past weeks. We believe downtrend in stock markets is yet to complete and further fall in oil price is likely.

China, the world's second largest oil consumer, also reduced oil consumption. Although global oil prices have corrected 50% over the past three months, China's fixed retail oil price policy restrained the country from enjoying low price. This probably is the government's attempt to slow down domestic oil consumption. The nation also announced last month a plan to reduce oil import which negatively impacts oil prices.

OPEC's target is to restore oil price to at least $80/bbl. After the 1.5M bpd cut last Friday, the cartel may further reduce 0.5-1M bpd at its December meeting in Algeria. OPEC will probably continue to cut oil productions going forward and it may take 12 months for price to react to the adjustments.

Apart from demand/ supply imbalance, dollar's strength against Euro further dampens oil price. We expect the greenback would strengthen against Euro, as the Euro zone has suffered more from the financial crisis than the States. Recent correction of Euro/USD would continue after the pair peaked in July 2008. As there is a high correlation between oil prices and the USD and Euro, this is a bad news for oil bulls.

Price movement for the coming week is mixed. The black gold's breach of 69.5 last week indicated the decline from 110.45 may have completed. However, it has to break 84.83 to confirm this view. On the downside, oil may still re-test 61.3 if the any weak economic data (such as non-farm payroll on Nov 7) is released.