Friday, April 23, 2010

Crude Oil Reverses Losses as Equities Closed Higher

Crude oil initially slumped as global stock market tumbled amid revision of Greece's debt deficits. Together with disappointing inventory report released Wednesday, the front month WTI contract plummeted to as low as 81.73. However, buying interests emerged at that level as price reversed and ended the day flat at 83.7. Strong rebound in equities and attack of Iraqi oil pipeline also supported oil.

After the EU released a report revising up 2009's Greek fiscal deficit to 13.6% of GDP from the 12.7% of GDP estimated previously, the Greek Financial Ministry reassured the market that will endeavor to shrink the deficit by 4%. With the upward revision and potential further revision, the country is unlikely to reduce the deficit to 8.7% of GDP as previously estimated.

Worse still, Moody's announced to cut its rating on Greek debt to A3 from A2. Moreover, Greek officials said that the country has prepared to ask the EU for a bridge loan. In US trading session, the market was further pressured by President Barrack Obama's call for new financial reform as well as the Senate's approval of derivative legislation requiring US lenders to spin off their swaps trading desks.

Despite the negative news, stocks managed to crawled back and DJIA and S&P 500 ended the day gaining +0.1% and +0.2%, respectively. Encouraging corporate earnings, mildly bigger than expected decline in initial jobless claims and stronger existing home sales data restored sentiment.

Specifically to the oil market, damage of an oil pipeline from Iraq to Turkey disrupted supply which will take around 3 days to resume.

Gold fell, halting a 2 day rally, as the euro tumbled to a new 11 month low against the dollar. However, the recovery after sliding to as low as 1132 signaled yellow metal's underlying strength. In fact, while the market has only focused on Greece's deficit issue, such problem has also rooted in other countries including the US, Japan and the UK. If worries intensify and spread to these countries, we believe gold should benefit.

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