FX: Crude oil Rallied on Strong US Data and Huge Inventory Decline
Trading momentum of crude oil was boosted by strong US existing home sales and API's estimates of oil inventory. The February contract closed at 74.4, up +1%, Tuesday after rallying to as high as 74.91.
Existing home sales jumped +7.4% to 6.54M units in November as a large number of buyers rushed to purchasing homes before expiry of the first-time home buyer tax credits (expected to expire in April 2010). Pullbacks may be seen in December and January after a huge increased in November. We need to monitor the trend before confirming that the housing market is back on healthy track. Nevertheless, investors were thrilled by the data as it exceeded market forecast of a +2.5% rise and viewed this as a sign of economic recovery.
After market close, the industry-sponsored API reported inventory declines in all major categories. Crude inventory drew -3.7 mmb to 330.7 mmb as refinery run rose. Cushing stock also saw drop of -0.12 mmb. Gasoline stockpile dipped -1.1 mmb to 215.8 mmb due to import reduction while distillate stockpile slipped -0.75 mmb to 165.7 mmb.
The estimates ignited investors' optimism on energy fundamentals. The market anticipates the EIA will report draws in crude oil and distillate inventories but further increase in gasoline inventory. Should gasoline inventory declined in contrary to consensus, energy prices should be pushed higher.
Near-term outlook for gold is quite bearish as USD stages a strong rebound after being hit hard for most of the year. The February contract was capped below 1110 yesterday and plunged to as low as 1075.2 before recovery. The yellow metal ended the day at 1086.7, -0.8% lower.
Strong US data fueled speculations that the Fed will increase the policy rate earlier than previously projected. Futures traders are now betting on a 48% chance that the Federal Reserve will increase the Fed funds rate by June. The dollar index edged +0.3% higher to 78.25 Tuesday. The gauge has gained +5.4% from 74.27, a low made on November 25. Against the euro, the greenback surged to 1.4218, the highest level in more than 3 months. Persistence in USD's strength will inevitably hurt gold's outlook unless more central banks increase purchases as price corrects.
