The commodity sector firmed last week with precious metals the best performer. Heightened hopes of further monetary easing from the Fed sent gold prices higher with important near-term resistance broken. The Fed’s August minutes were dovish, indicating further monetary easing highly likely. As the minutes indicated that many members believed that more monetary easing measures should be implemented soon unless upcoming economic data showed "a substantial and sustainable strengthening" in economic recovery. Further monetary easing has now become a matter of "when", instead a matter of "if". PGMs soared as driven by supply disruption in South Africa. Labor strike in platinum mines operated by Lonmin has tendency to spread to other mines and the supply/demand balance will be affected. However, we expect surplus will remain this year. Rally in crude oil prices paused after gaining over the past few weeks. Sanctions over Iran and maintenance in a North Sea field are raising concerns over supply problems. On the demand side, both OECD and non-OECD demand appeared to grow in the third quarter. These all together led to recent strength in oil prices. The WTI-Brent narrowed last week but remained in the double-digit territory. Debates have been on whether the spread will widen further in coming months. In our opinion, further widening seems unlikely as factors sending Brent crude oil prices higher have priced in while the situation in WTI crude is not as poor as perceived. Yet, we expect the spread will continue hovering around current levels.
Crude Oil: Crude oil paused after rallying over the past 3 weeks. However, the outlook remained firm and big correction appears unlikely in the near-term as strong fundamentals remained in place. Maintenance at the Buzzard field has tightened supply in the North Sea. The situation will only improve when it’s completed in September. The North Sea supply has widened WTI-Brent spread in recently. There have been discussions over whether the situation will exacerbate in the fourth quarter. We think this is not likely. Relief in oil supply after maintenance, seasonally weaker crude demand after mid-October and potential SPR release are expected to ease the tight oil market in coming month.
Concerning WTI crude, overcapacity has been the main reason for sending WTI crude oil price below than of Brent. The situation will alleviate modestly as more storage facilities have been invested over the past 1-2 years in Canada, Cushing and the Midwest The sharp fall in WTI crude oil prices due to the Cushing over-stockpiling should not repeat.
Natural Gas: Nymex natural gas price plunged for a 5th week. According to the DOE/EIA, natural gas storage increased 47 bcf to 3 308 bcf in the week ended August 17. Stocks were +423 bcf higher than the same period last year and +357 bcf above the 5-year average of 2 951 bcf. Separately, Baker Hughes reported that the number of gas rigs gained +2 units to 486 in the week ended August 24. Oil rigs fell -17 units to 1 408 and miscellaneous rigs dipped+1 unit to 4 and the total number of rigs was down -16 units to 1 891 units. Directionally oriented combined oil, gas, and miscellaneous rigs slipped -9 units to 229 units while horizontal rigs increased +6 units to 1 159 and vertical rigs slid -13 units to 519 during the week.
Precious Metals: Gold extended the rally last week after breaking above important resistance at 1640. The dovish FOMC minutes for the August meeting raised speculations of QE3. As the meeting was held before release of the July employment report, we believe the next trigger point would be the August report (due September 7), together with the Beige book and Fed Chairman Ben Bernanke’s Jackson Hole address on August 31. However, while it’s likely that further monetary measures would be announced in September, the tool might not necessary be QE3. Judging from the tone in the minutes, policymakers might choose to change the language guidance at that meeting.
Platinum price has rallied more than $150/oz since August 15 as violence at Lonmin mines has raised concerns over production suspension. The spread between gold and platinum has since narrowed. However, it’s uneasy for platinum to regain its premium over gold like 2011 and before. It is because the production losses in Impala and Aquarius Platinum, Eastern Platinum and Lonmin, while evidenced the risks posed by labor actions in South Africa on production, are likely to remove the surplus (supply> demand) in the platinum market in 2012.
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