Crude and Gold get off the floor

Crude oil ($96.74) rose from it lowest price in two-weeks as a surprise drop in weekly US inventories coupled with violent outbursts in Saudi Arabia countered concern that Europe’s sovereign debt crisis will threaten the global economy. Stockpiles have dropped to their lowest point in nearly two-years. Earlier yesterday, the commodity’s intraday price fell to a three-week low after Germany failed to find buyers for +35% of its 10-year issue at an auction. In this US holiday shortened week, the decrease in inventory is going to be a supportive factor to keep crude prices from losing too much ground. Month-end requirement should be capable of pulling it temporarily higher.

Last week’s EIA report showed that crude inventories fell sharply as refinery rates rose and crude imports fell. US crude stocks fell by -6.22m barrels to +330.82m. In contrast, analysts had been predicting a build in inventory of around +500k. This is the lowest level recorded in 10-months. Refinery utilization rose +0.7% to 85.5% of capacity, slightly more than analysts’ expectations for a +0.5% gain. Crude imports fell-246k barrels per day to +8.28m. On the flip side, gas stocks rose +4.48m barrels to +209.63m, compared with a +1.1m barrel anticipated build. The four-week average demand was-4% lower for the same period last year. Digging deeper, distillates (heating oil and diesel) fell-770k barrels to +132.96m. The market had been expecting a much deeper draw, north of million barrels. Distillate stocks are currently at their lowest level in three-years and have posted their largest two-month drop in 16-years. The four-week average demand for distillates last week was +5.7% higher than the year-ago period. Cushing inventory levels only fell-13k to +32.02m barrels.

In conclusion, the large crude oil drawdown and low level of imports gives the report a bullish tone, but the gas inventory build and the continuing trend of lackluster demand could trump crude fundamentals. The market should be expecting more sellers topside.

Gold prices ($1,701) have cautiously rallied this morning on bargain hunting. However, global bourse declines blamed on the Euro sovereign debt crisis is expected to again prompt investors to liquidate bullion positions to cover losses in other asset classes. Another rally in the reserve currency of choice, the dollar, is also expected to pressurize prices. Asia and Euro equities have been struggling since yesterday’s 10-year Bund auction failure. Prices have eased more than-10% since hitting a record of around $1,920 in September.

The commodity’s recent decline has been very much a market “anomaly”. The yellow metal has moved lower in tandem with riskier assets, resisting its traditional trend of rising in uncertain times. The commodity is in danger of falling further due to ‘selloffs’ in other markets, as investors liquidate bullion positions to cover losses elsewhere as funding dries up. Despite this, on dips there are some good buyers waiting in the wings.

In India, Asia’s third largest economy, investors have been dumping bonds, switching asset classes and pouring record amounts into gold. The market has been seeking shelter from inflation that has held above+9% for the past eleven-months. For the rest of us, the market has wanted to own some of the “shiny metal” as a safe haven investment away from market turmoil.

Longer term investors have been using the commodity as a safe-haven alternative to equities or FX. Individuals seem to want to insulate themselves from steeper price falls. The bullion is in its eleventh-year of a bull market. Despite the market being in the midst of a completely risk-off mentality, and with gold not been seen as a “flight-to-safety vehicle” analysts do not think that the long-term bullish outlook has changed.

Bigger picture, the commodity has also found support on concern that US monetary policy aimed at shoring up growth will eventually spur inflation. With global sentiment in the fragile category, gold is expected to shine as the go to “safer-haven” prospect, once we are done with “raising funds”!

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