Saudi Arabia Set to Raise Crude Oil Production

2 major themes dominating the market are Japanese government's unexpected intervention of yen and Fed's extension of QE by increasing bond purchases. Gold consolidated in Asian and European sessions after rallying above 1270 yesterday. Outlook remains firm and is likely to extend gains to 1300. Crude oil weakened for a second day and is currently trading below 76. Despite OPEC's downward revision on demand for the cartel's oil, Saudi Aramco said that it's ready to boost production as consumption in emerging markets expands.

With the exception of China, most Asian stocks surged as led by Japan's Nikkei Stock Average which added +2.34%. Japan's measures to curb yen's appreciation revived optimism on the country's export-driven economy. For the first time in 6 years, the BOJ intervened by buying dollar and selling yen as the country's currency has surged to the highest level in 15 years. The action was a surprise to the market as it's widely expected Naoto Kan, the re-elected Prime Minister, is less aggressive in curbing yen's appreciation. That said, the impact of the intervention should not last for long as it appeared to be carried out unilaterally, rather than in collaboration with other central banks.

China's stocks fell amid speculations that the country may raise banks' capital adequacy ratios to as high as 15% by 2012 and the government will accelerate restrictive measures to boost energy efficiency in coming months.

At an interview with the Globe and Mail, a Canadian newspaper, Khalid al-Falih, head of Saudi Aramco, Saudi Arabia's state oil company, said he expects global demand for crude oil to rise, mainly from from China and India, and the company is ready to boost production to meet any increase. The comments appeared to be in contrast with OPEC's monthly report that lowered the demand for the cartel's output by -0.1M bpd and -0.2M bpd for 2010 and 2011 respectively as non OPEC production increased. We believe Khalid's saying aimed at reducing the country's spare oil capacity.

Saudi Arabia, which produces 8.5M bpd and has the capacity for an output of 12.5M bpd, is looking to increase output by about +2M bpd over the next 5 years, thus trimming the spare capacity 2M bpd. According to OPEC's September report, the 11 members bearing quotas produced 26.799M bpd, bringing the compliance level +0.9% higher to 53.5%, in August.

The US government will report industrial production which probably grew +0.3% m/m in August, following a +1% growth in the prior month. Capacity utilization rate should have climbed to 74.9% in August from 74.8% in July. The Empire State manufacturing index is expected to have crawled higher for a second month to 9 in September after plummeting to a 7-month low of 5.1 in July.

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