Sunday, September 12, 2010

China's Outlook Dominates the Market

While market sentiment was dominated by renewed concerns over the stability of the European banking system earlier in the week, better than expected bond auctions in Portugal and Poland eased the worries. Confidence was further boosted by the weekly drop in US jobless claims and China's trade data which suggested the country's demand for foreign goods remained strong.

Oil started the week moving within a narrow range with a soft tone but strength in stock markets drove price higher. Prices were further lifted after reports of shutdowns of production facilities. Gold jumped earlier in the week as sovereign risks in the Eurozone spurred demand for safe havens. However, failure to breach the record high triggered selloff.

Crude Oil
Oil price jumped on Friday as better-than-expected data from the US and China boosted optimism of the demand outlook. The front-month WTI contract jumped to a 4-week high of 76.73 before settling at 76.45, up +2.48% on weekly basis. Fuel prices also soared with heating oil and gasoline futures gaining more than +2%. Brent crude also rose but the increase was milder than WTI crude.

Movement of WTI-Brent spread was dramatic last week. The front-month WTI contract had widened to a $3.65 discount to ICE Brent on Tuesday (Sep 7) before narrowing to $1.71 on Friday. The change was mainly driven by shutdown of the largest pipeline operated by Enbridge Energy Partners due to a leak. According to the company, the pipeline can carry 670K bpd of oil from Canada to refineries in the US Midwest. The direction of the WTI-Brent spread in the near-term depends on when the pipeline can resume operations. Indeed, Enbridge closed another line, which transports oil from Indiana to Ontario, 6 weeks ago after a spill in Michigan. Repair of the line has been finished but US regulators has not yet permitted it to resume operations.

We do not expect WTI crude oil to return parity or even at premium to Brent crude in the short term as total crude oil inventory remains at record high and Cushing stock is abundant......Read the entire Oil N' Gold Focus Report


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