Weekly Fundamentals -WTI Weighting Cut as International Benchmark

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November 11, 2012 10:37 AM EST

While commodities generally recorded gains during the election week, trading was choppy as crude oil prices actually plunged sharply a day after the election as the focus returned to whether the US would be able to overcome the challenge of the fiscal cliff. With election of Barack Obama as the US president, risk of gold’s outlook is to the upside as ultra accommodative monetary policy would likely be retained. As the election dust is settled, the sovereign debt crisis in the Eurozone also returned to the centre stage. At the November ECB meeting, President Draghi left the main refinancing rate at 0.75% and the OMT unchanged despite downgrade of the 17-nation region’s economic outlook. In Greece, the Parliament passed a new set of austerity measures so as to tap the new tranche of rescue loan worth of 31.5B euro. Yet, the sum might not be arrived on time and the government has to issue short-term debt next week so that it could fulfill the obligation of debt repayment on November 16. The short-term bonds include treasury bills of 2.1B euro maturing in 4 weeks and 13-week bills worth of 1B euro.

Crude Oil: While both benchmark crude contracts gained during the week, the price actions were rather choppy. Relief rallies after the election were short-lived as both WTI and Brent crude experience sharp declines on the day after the US elections. During the week, WTI crude added +1.43% while Brent crude soared +3.52%, maintaining the WTI-Brent spread at 1-year low (above 20). S&P’s cut WTI contract’s weigh in its GSCI commodities index next year while raised that of Brent. the agency said that WTI’s weighing would contribute 24.71% of the index, down from 30.96% this year while that of Brent contract would make up 22.34% of the index, up from 18.35% currently. According to S&P, "there's been a migration of volume toward Brent” and "Brent represents the global market more than WTI”. Indeed, recent incidents have resumed talks that WTI should not be used as the key benchmark of international crude oil prices.

The latest weekly oil inventory report revealed the impact of hurricane Sandy on US oil supply. Crude inventory added +1.77 mmb to 374.85 on weekly basis. For fuel products, gasoline and distillate gained +2.88 mmb and +0.13 mmb respectively. All the above categories stayed above respective 5-year averages. In terms of demand, gasoline consumption slumped to 8.31M bpd, the lowest level since March.

Another issue is the rapid increase in crude oil supply in North Dakota (in PADD 2) which is now the second largest oil producing state, after Texas, in the US. Although drilling activities have been on the decline, oil production is in reverse, with production reaching 702M bpd in August. The number of oil rigs dropped to 176 in September, the lowest level since August 2011 and down -12% from the all-time high of 200 in June.

Natural Gas: The DOE/EIA reported that natural gas storage rose +21 bcf to 3 929 bcf in the week ended November 2. Stocks were +109 bcf higher than the same period last year and +244 bcf above the 5-year average of 3 685 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -11 units to 413 in the week ended November 8. Oil rigs increased +16 unit to 1 389 and miscellaneous rigs added +1 unit and the total number of rigs added +6 units to 1 806. Directionally oriented combined oil, gas, and miscellaneous rigs dropped -1 units to 194 units while horizontal rigs stayed slid -1 unit at 1 104 and vertical rigs gained +8 units to 508 during the week.

Precious Metals: The complex rose across the board but gold and silver obviously outperformed PGMs during the week. Gold’s rebound after the US election was a signal of confidence that the Fed would continue unconventional monetary easing, i.e. QE3. PGMs, with a great deal of characteristics as industrial metals, fell amid concerns over fiscal cliff in the US and softening in strikes in South African mines.

Oil and Gold Reports contributed by Oil N' Gold

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Oil and Gold Reports contributed by Oil N' Gold

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