Market Insights

Oil Investors To Face More Sector−Specific Factors − Inventory Today And OPEC Meeting Later The Month

Wed, May 6 2009
by Oil N' Gold Team

More Analysis and Technicals on Crude Oil, Natural Gas, Gold & Silver

Failure to break 55 level and subsequent pullback halted crude oil's 4-day rally. Settling at 53.84, the benchmark contract slipped 1.15% as investors took profit before the US inventory report today. Moreover, retreats in stock market ahead of Thursday's stress test result also affected oil price's performance.

The US Energy Department may report an 8th consecutive weekly increase in crude inventory, by 2.5 mmb, to 377.2 mmb for the week ended May 1. For gasoline and distillate, stockpiles probably gained 0.65 mmb to 213.3 mmb and 1 mmb to 145 mmb, respectively.

Data from American Petroleum Institute (API) surprisingly showed reduction in crude storage last week. Against market expectation of a 2.1 mmb gain, crude oil inventory drew 1 mmb as refinery runs increased by 0.36 mmb while imports remained unchanged. Gasoline inventory was also reduced by 2.9 mmb, compared with consensus of a 0.7 mmb increase. For distillate, stock build was slightly lower as increase in demand partly offset the high refinery utilization.

OPEC members will meet later this May to decide on oil output. After keeping quota unchanged at the previous meeting in March and seeing oil price remains 60% lower than the 147.27 peak in July 2008, the market expects the organization will announce production cut in the coming meeting. However, opinions among members have been mixed and many of them seemed to have downplayed the need of further reduction.

Since September 2008, OPEC has agreed to cut output by 4.2M bpd and the compliance level has been over 80% so far. According to surveys done by Reuters and Bloomberg, OPEC-11 production was around 25-25.5M bpd in April from a month ago, compared with target of 24.845M bpd and 25.63M bpd in March. However, compliance was not executed by all of the members. Among the 11 members with quota, Angola, Algeria, Iran and Nigeria produced more than they were assigned. The 'overproduction' was offset by Saudi Arabia, UAE, Kuwait and Qatar, members who produced less oil than their target during the month.

Gold for June delivery pared earlier gains (intraday high: 916.7) and settled at 904.3 Tuesday on the dollar's rebound. Today, the precious metal trades narrowly around 900 level as we expect sideways trading to continue as investors await ECB's rate decision and the Fed's stress test result.

The dollar index rebounded to close at 84.16 yesterday and the strength remains today. Against euro, USD rises to 1.327 and against the pound, it surges to 1.5. ECB's meeting Thursday is the critical factor determining the outlook for EURUSD and hence gold, given the high correlation between the 2 instruments. Currently, the market has priced in 25 bp rate cut to 1% at the meeting, Moreover, it's widely anticipated that the Council members will agree on some forms of non-standard measures. However, as we see that views among members regarding quantitative easing have been diverged, there's always possibility for unexpected outcomes.