Commodities Stubbornly Bid

Oil prices have pared gains and retreated from its recent highs after the Italian PM Berlusconi was incapable of winning an absolute budget majority vote, casting doubt on the country’s ability to enact austerity measures under his leadership. However, strong seasonal fundamentals and concerns about a rising dispute over Iran’s nuclear program is providing support on pullbacks, and trumps the worries caused by Italy’s sovereign debt risk.

Fundamental reasons have driven this market higher over the past week. Gas supplies are low in certain parts of the world, “everything is now backwardated from gas to crude and economies head into the biggest demand month of the year”. In theory, with a temporary solution to the Greek problem, strong seasonal demand for heating oil, low gas stockpiles in Europe, low distillate stockpiles in the US, and China becoming a net diesel importer this month is only providing fuel to the higher price theory.

Last weeks EIA report showed that crude inventories rose +1.83m barrels to +339.4m, just above a projected build of +1.1m. Imports of the black stuff fell by -419k barrels per day to +8.92m. Not to be left behind, gas stocks rose by +1.36m to +206.2m barrels, compared to a -600k draw forecasted by the street. The average gas demand in the last four-weeks fell by an aggressive -4% compared with demand this time last year. Distillates (heating oil and diesel) fell by -3.58m to +206.2m barrels, compared with analyst’s forecast for a smaller -1.5m draw. The four-week average demand for distillates (+4.2m) was the highest in two-years. The refinery utilization rose by +0.5% to +85.3%. Analysts had been expected a smaller gain of around +0.1%.

Despite the bearish storage report the market is moving higher following the economic data and the dollar.

The market is back to wanting to own some of the “shiny metal” as a safe haven investment away from market turmoil. Gold last week had buckled under pressure from the dollar after Greece blindsided the financial markets by calling a referendum on a supposedly agreed financial plan. There is more of a risk aversion type dynamic developing because of all the complications around Europe. Any political or macro uncertainty is promoting risk aversion trading strategies. Investor’s interest in the yellow metal has continued to pick up all week, as reflected by the inflows of metal into ETF’s according to analysts.

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 and has rallied more than +11% since the end of September.

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 remains the go to “safer-haven” prospect. If we include the demand for ‘physical’ gold from India, then both of these reasons should provide the strongest tangible support to want to own some on these pullbacks. Retracements and corrections are possible even as the market ties to breach the psychological $1,800 barrier with conviction ($1,799 up+$3.20).

Other Dollars get a boost from Gold