Weekly Fundamental Outlook for Energies and Metals - A Race To Zero

It was a historic week. In the US, we've got the first black president from whom the Americans are expecting the changes. On the other side of the Atlantics, BOE made a surprising rate cut of 1.5% while ECB trimmed by 0.5%. Both central banks' actions indicated recession is still with us and we do not know how deep it is.

Borrowing costs are now lower than inflation for the first time since the early 1980s. As economic growth is decelerating and inflation is not an issue, there's not much obstacle for central banks to cut interest rates. Last Friday, the US Labour Department reported worse-than-expected employment data which raised chance for the FED to cut interest rate from 1%.

RJ/CRB Commodity Index fell 4.3% last week as investors continued to worry about the demand outlook.

Crude Oil

In early part of the week, investors' fancy about the changes brought by the new US president pushed oil price to 71.77. However, the excitement didn't last long. Shortly after the election, demand concerns re-emerged and sweet, light crude oil for December delivery dived to 59.97 before settling at 61.04 Friday. Over the week, the benchmark contract dropped nearly 10%.

Demand/ supply outlook remained the determining factor on oil price outlook. As oil demand is a function of economic growth, the disappointing World Economic Outlook released by IMF on Nov 5 might signal that previous oil price forecasts by economists were too optimistic. IMF projected world GDP growth would be 2.2% in 2009, 0.8% lower than previously forecast. At the same time, average oil price next year was also lowered to $68/bbl from $100/bbl.

We expect many analysts will revise their price targets downward, mainly because China, the world's second largest oil consumer, is seeing slowdown. Excessive oil inventory and reduction in industrial activities reduced the need for oil import. Credit Suisse reduced GDP growth of China to 6% in 1H09. Although recovery is anticipated to be seen in 2010, growth would still be a single-digit 8.5%, the lowest level in recent years. The bank also expected the nation's oil demand to be flat next year, instead of 4% as previously forecast.

On the supply side, OPEC, which controls 40% oil supply in the world, would probably continue to reduce their production. On Oct 24, the cartel met in Vienna for an emergency and decided to slash output by 1.5M bpd. Unfortunately, 2 weeks passed and oil price dropped another 5%. We expect OPEC would announce another production cut in their next meeting in December. In fact, the situation was inline with our anticipation. Normally a production cut does not work well during economic slowdown or recession as demand was deteriorating so fast that output tightening cannot catch up with it. That said, a series of cut would help in 12 months.

Good news for oil price is IEA raised its long term forecast on oil price. The agency forecast price to increase to $120/bbl by 2030, up 11% from the previous forecast of $108/bbl.

For the coming week, there's chance for the black gold to continue the rebound from 59.97. However, it should be capped below 71.77. On the downside, we see further weakness to 53.69.