Oil Fails to Benefit from USD Weakness

Dataflow continued to weigh on the dollar, pushing other major currencies higher, yesterday. With the exception of the US energy sector, commodities were buoyed by a weaker dollar. Comex gold for December delivery soared to as high as 1298 before settling at 1292.1, up +1.40%. Silver rallied with the benchmark contract closing above 21 for the first time since mid-March 2008. In the base metal complex, copper surged to a 5-month high while tin jumped after Indonesia reported decline in exports in August. US oil prices erased gains made earlier in the day as oil inventories unexpectedly increased despite shutdown of the Enbridge pipeline during the week. WTI crude oil for November delivery ended the day at 74.71, down -0.35%. Prices for oil products also dropped with heating oil and gasoline losing -0.61% and -0.96% respectively.

The US house price index surprisingly contracted -0.5% m/m in July, following a downwardly revised -1.2% decline in the prior month. The market had anticipated a milder drop of -0.1%. Moreover, the MBA's new purchase mortgage applications index plunged3.3% last week, with the 4-week average down -37% y/y. The readings reminded investors the vulnerability of the housing market and would be taken as a factor pushing the Fed closer to further easing. The dollar tumbled, weakening against major currencies except for Canadian dollar. EURUSD added more than +1% despite disappointments from Eurozone's industrial orders and consumer confidence index. GBPUSD climbed +0.3% even though the BOE minutes hinted the central bank might move towards further easing.

Shrugging off the threat of further intervention, Japanese yen rose for a 3rd day against the US dollar. Concerning commodity currencies, AUDUSD hit a 2-year high and is approaching parity as RBA signaled further rate hike might be earlier than market forecasts. NZDUSD also edged higher yesterday but gains were erased in Asian session today as 2Q10 GDP growth missed expectations. Canadian dollar was the only major currency that fell against the US dollar yesterday. Canada's retail sales contracted -0.1% n/n in July after gaining +0.1% in the prior month. The market had anticipated a growth of +0.6%. Excluding auto, the decline extended to -0.5% from -0.3% in June.

Currently hovering around 74/75, crude oil price has dropped almost -6% year to date and around -15% from this year high of 87.15. However, OPEC appears satisfied with the price. The group will be meeting on October 14 but OPEC President Wilson Pastor said there are ‘no plans to change OPEC policies regarding production or prices… The world economy is growing, it's exiting the recession and as the economy grows, that will go hand in hand with robust growth in oil prices'. The comment was made although the group downwardly revised the 2011 demand forecast for its oil output earlier this month. Notwithstanding expansion in non OPEC production and abundant inventories in advanced economies, many OPEC members have been producing exceeding their quotas. In August, the 11 members bearing quotas produced 26.80M bpd, compared with the limit of 24.85M bpd. Compliance level climbed slightly to 53.5% from 52.6% in July but remained significantly lower than78.6% in March 2009.

Nigeria's Petroleum Minister Diezani Alison-Madueke said the country will ask OPEC to increase its quota from 1.673M bpd. The country produced 2.01M bpd in August. In our opinion, lack of commitment from OPEC members to control production in an environment of high oil inventory and flaggy demand in advanced economies would damp the outlook of crude oil price.

Courtesy of ONG Focus.....

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