Crude oil prices rebounded in Asian session on Monday as China had not announced a rate hike over the weekend even though inflation surged above 5%. The increase in reserve requirement ratio (RRR) last week was viewed as a tame measure and eased concerns about slowdown in growth. The benchmark contract for WTI crude oil climbed to 88.26 after settling at 87.79 last Friday. Sustainable rally above 90 needs significant improvement in global oil demand outlook but it appears unlikely in the near-term. The OPEC left production quotas unchanged, forecasting price above 90 was driven by temporary factors such as cold weathers and weak US dollar. Gold price edged higher but another leg of correction cannot be ruled out as price movement remained consolidative.
Financial markets slumped last Friday as the China's CPI surged +5.1% y/y, the highest level since July 2008, in November. PBOC's RRR hike, the third time within a month, was a signal that the government is committed to curb inflation. However, the fact that the government had not announced a rate hike during the weekend surprised the market and worries about slowdown in Chinese economic growth moderated temporary. This is the main reason driving commodity prices higher in Asian session today. We believe the optimism is temporary as the central bank will tighten by raising interest rates in coming months to tackle stubbornly-high inflation.
The OPEC decided to leave production quotas unchanged at current levels amid forecasts that demand growth in 2011 will be lower than that in 2010. The 'fragile global economic recovery, including the adverse effect of possible currency conflicts and fears of a second banking crisis in Europe' as well as 'lower industrial output, lagging private consumption, persistently high unemployment and ample spare capacity throughout the oil supply chain' in OECD would constrain growth in oil consumption.
The most important event this week is the FOMC meeting (Tuesday). Policymakers will evaluate the $600B asset-buying program announced last month and reiterate the commitments to accommodative monetary stance. At the SNB meeting on Thursday, policymakers will leave the 3-month target rate unchanged at 0.25%. After revising down its inflation outlook in September, we believe the central bank will not revise it further lower, despite recent sovereign crisis in the Eurozone, as economic developments in Switzerland have been healthy since the previous meeting.
Commitments of Traders:
Speculators were bullish on the energy complex in the week ended December 7. Net length for crude oil futures increased 29 663 to a record high of 176 557 contracts. Net length for heating oil futures and gasoline futures also soared, by 16 949 and 2 158, to 38 944 contracts and 73 587 contracts respectively. Net shorts for natural gas futures, however, added 5 822 to 175 901 contracts although storage declined due to cold weather.
Views on precious metals were mixed. Net length for gold futures rose for a third week to 232 751 contracts while that for silver futures slipped to 32 969 contracts. For PGMs, net length for platinum futures climbed for the first time in 4 weeks to 23 354 contracts while that for palladium futures dipped -89 to 13 759 contracts.
