: Daily 9 December 2010 Walter de Wet, CFA* Walter.DeWet@standardbank.com Focus: The oil term structure gets a reality check Leon Westgate* Leon.Westgate@standardbank.com James Zhang* James.Zhang@standardbank.com Focus: The oil term structure gets a reality check As pointed out in our daily notes since last week, we ve been expecting the strength in the WTI term structure to be short-lived. Yesterday, the forward curved moved back into a contango, even steeper than levels seen on 2 Dec 10 Despite the latest rise in US real interest rates, the fact that the level of real rates remains low, still makes gold investment attractive. As a result we believe real interest rates will have to rise much higher before any long term negative impact will be seen on gold investment. The weekly DOE report showed crude inventories were drawn by 3.8mbbl, gasoline inventory build 3.8mbbl and middle distillate inventory was up by 2.2mbbl. After a soft start, the base metals complex rallied strongly during Wednesday afternoon, relentlessly grinding higher throughout the afternoon, then moving sharply higher as shorts covered back their positions towards the close. The metals have generally consolidated this morning, though a stronger dollar is dragging on metals slightly heading into the afternoon. Commodity price data (8 December 2010) Base metals LME 3-month Open Close High Low Daily change Change (%) Cash Settle Change in cash settle Cash 3m Aluminium 2,320 2,374 2,381 2,362 70 2.33% 2,296.00-30 -16.00 Copper 8,849 9,015 9,070 8,980 30 1.88% 8,882.00-142 32.25 Lead 2,370 2,408 2,431 2,385 7 1.60% 2,362.00-40 -19.00 Nickel 23,800 24,000 24,350 24,150-95 0.84% 23,750.00-300 -52.00 Tin 25,500 25,650 25,850 25,300 400 0.59% 25,580.00-600 -26.00 Zinc 2,284 2,312 2,294 2,258 9 1.23% 2,276.00-32 -10.00 Open Close High Low day/day Change (%) ICE Brent 91.27 91.15 91.52 91.00 0.38 0.42% NYMEX WTI 88.55 88.98 89.20 88.52 0.70 0.79% ICE Gasoil 763.00 763.00 763.00 763.00 5.75 0.75% API2 Q1'11 114.70 113.00 - - -1.70-1.50% EUA Dec10 14.78 14.67 - - -0.11-0.74% AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFPs Gold 1,395.00 1,385.50 1,404.25 1,372.50 1,381.80-26.00 0.6/1.0 Silver - 28.68 29.20 28.00 28.25-1.37 3.0/5.0 Platinum 1,686.00 1,683.00 1,693.00 1,677.00 1,680.00-20.00 0.0/2.0 Palladium 737.00 729.00 735.00 717.00 728.00-10.00-1.0/1.0 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.
Daily 9 December 2010 Focus: The oil term structure gets a reality check The term structure for crude oil strengthened significantly towards the end of last week. It led to the 1-to-12 months spread hitting its highest level in more than two years at -$0.30c/bbl. The 6-to-12 month spread was in backwardation at $0.50c/bbl on the 6 Dec 10. In comparison, the two spreads was settled at -$1.89/bbl and - $0.63/bbl respectively on 2 Dec 10. However, as pointed out in our daily notes since last week, we ve been expecting the strength in WTI term structure to be short-lived. Yesterday, the forward curved moved back into a contango, even steeper than levels seen on 2 Dec 10 (refer to Figure 1). We maintain the view that the current inventories level does not warrant such flat term structure during the last few days. The latest DOE inventory report gave the market a reality check. Despite a draw of 3.8mbbl last week, US crude inventories were still 32.3mbbl above 5-year average and 19.8mbbl above 5-year high set in 2009. (refer to Figure 2). More importantly, the recent draw in crude was caused largely by a reduction in crude oil imports rather than material increase in demand. Nevertheless, we do expect US crude inventories will be drawn down at a faster pace in coming months than the pace observed in 2010. This should happen on the back of a continuous discounted WTI price and a seasonal increase in demand. However, we look at the deviation from the seasonal pattern, rather than absolute level of moves in demand or inventories for market directions. With the recent rally in both the flat price and the term structure, we see more upside potential in spreads towards the back-end of the curve, around Cal13 and Cal14, rather than the front end of the curve. Figure 1. WTI forward curve 90.7 89.9 89.1 88.3 87.5 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Sources: DOE; Standard Bank Figure 2. US DOE crude commercial inventories 390,000 360,000 330,000 300,000 $/bbl WTI: 2/12/2010 WTI: 6/12/2010 WTI: 8/12/2010 kbbl 270,000 Jan Feb Apr May Jun Aug Sep Oct Dec 5-yr Range 2008 2009 2010 5-yr Average By James Zhang Sources: DOE; Standard Bank Base metals After a soft start, the base metals complex rallied strongly during Wednesday afternoon, relentlessly grinding higher throughout the afternoon, then moving sharply higher as shorts covered back their positions towards the close. The metals have generally consolidated this morning, though a stronger dollar is dragging on metals slightly heading into the afternoon. Copper remains well supported in spite of the stronger dollar, holding above $9,000 after setting another record high this morning. Copper recovered very strongly yesterday afternoon, boosted by short covering. The impact of weak longs and weak shorts will likely continue to se volatile trading ahead of the weekend and the release of the latest Chinese economic data. Meanwhile, although the excitement generated by the expected launch various base metal ETF/ETP s may have added a bit of extra spice to proceedings, the effect on market perception, particularly in terms of the various copper ETF s, has in our view tended to show up in the spreads rather than necessarily in outright prices. The proposed JP Morgan and Blackrock copper ETF s are initially expected to have a combined holding in the region of 183 kt of metal. Whether this is related to the current dominant position holder of copper warrants or not, the market perception is that the warrants are nevertheless tightly held. As such, the spreads are already behaving as if on-warrant copper stocks are closer to 150 kt rather than the current level of 325 kt. Elsewhere, zinc tracked copper higher yesterday, trading back above $2,300. Prices have since fallen back, with the metal unable to sustain yesterday s move, though turnover has been very good, with the this morning s pullback triggering good twoway interest. Lead prices have also fallen back after yesterday s gains, with a large 1,775 mt increase in on-warrant stocks impacting on sentiment. By Leon Westgate 2
Daily 9 December 2010 Precious metal prices are steady. Gold is finding good support around the $1,380 level. The liquidation of platinum and palladium have slowed and silver is steady above $28.00. Since last week US treasury yields has risen sharply. The move in the 10-year UST yield, from 2.90% last week to 3.25% today, was rather violent for such a deep and liquid market. Since break-even inflation in the US (as derived from the bond market) remains largely unchanged, implied real interest rates in the US has also moved higher in recent days. The 10-year implied real interest rate in the US is now at 1%, up from 0.60% at the end of November. A rise in real interest rates is bearish for gold and seems to be capping upside at the moment. However, despite the latest rise in US real interest rates, the fact that the level of real rates remains low, still makes gold investment attractive. As a result we believe real interest rates will have to rise much higher before any long term negative impact will be seen on gold investment. The PGM market is still lacking upwards momentum and this may well remain the case until China s inflation release is out of the way on Monday. The market remains nervous about possible more monetary tightening in China which may slow consumption expenditure. Gold support is at $1,367 and $1,352. Resistance is at $1,400 and $1,420. Silver support is at $28. A breach below this level may see silver test $27.55 and $26.97. Resistance is at $29.10. By Walter de Wet Oil followed the dollar yesterday despite a very brief sell-off after the weekly DOE report yesterday. Front-month WTI and Brent settled 41c/bbl and 62c/bbl lower respectively. At the same time, the crude oil term structure continued to weaken. First to twelfth-month WTI spread lost 45c/bbl to settle at -$2.18/bbl, a big drop from -30c/bbl on Monday (see Focus). RBOB gasoline cracks weakened by 14c/bbl as a result of a large gasoline inventory build. The weekly DOE report showed crude inventories were drawn by 3.8mbbl, gasoline inventory build 3.8mbbl and middle distillate inventory was up by 2.2mbbl. These came reasonably close to our forecast reported yesterday (crude/gasoline/distillate - 3.5/+2.8/+1.5 vs market consensus of -1.5/0.8/-0.9). The swing of inventories from crude to products was caused by a sharp rise in refinery runs of 4.9%. On a 4-week running average basis, gasoline demand stayed flat in the US, while distillate demand was sharply down by 183kbpd. Although we do not believe the sharp drop in distillate demand reported in recent weeks has set a downward trend, we will be watching very closely on distillate demand. Looking ahead, we expect the term structure to continue to correct. Flat prices look vulnerable after the recent strong rally, while Chinese inflation and the euro-debt crisis remains in the background. By James Zhang 3
Daily 9 December 2010 Base metals Daily LME stock movement (mt) Metal Today Yesterday In Out One day change YTD change (mt) Contract turnover Aluminium 4,281,425 4,287,225 1,700 7,500-5,800-347,475 186,925 4.37 231,211 Copper 350,250 351,375 925 2,050-1,125-152,075 26,075 7.44 166,064 Lead 203,450 203,550 275 375-100 56,950 8,900 4.37 34,453 Nickel 131,592 131,412 246 66 180-26,418 5,748 4.37 38,726 Tin 15,665 15,700 0 35-35 -11,100 1,435 9.16 14,250 Zinc 632,175 632,825 0 650-650 144,125 31,550 4.99 81,228 Shanghai 3-month forward prices COMEX active month future prices ZAR metal prices (8 December 2010) Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 15,953 61,712 16,411 165,015 177,730 15,814 6.9480 3-month 16,713 63,467 16,953 168,965 180,581 16,277 7.0402 futures pricing Price Change Price Change Price Change Price Change Price Change 1-month forward 2-month forward 3-month forward 6-month forward 1-year forward Sing Gasoil ($/bbbl) 100.63-0.60 102.05-0.86 102.49-0.73 103.14-0.58 - - Gasoil 0.1% Rdam ($/mt) 763.00 5.75 771.00 6.25 775.25 6.00 781.00 7.75 NWE CIF jet ($/mt) 825.07-5.14 830.75-5.42 834.55-5.43 844.39-5.34 Singapore Kero ($/bbl) 101.66-0.79 103.20-0.86 103.69-0.73 104.31-0.58 3.5% Rdam barges ($/mt) 473.60-0.48 476.75-0.25 479.25 0.25 485.86 1.27 1% Fuel Oil FOB ($/mt) 485.65 0.56 490.00-0.25 494.50 0.00 505.86 1.27 Sing FO 380 Cargo ($/mt) 100.15-100.15-100.15-100.15 - Sing FO180 Cargo ($/mt) 506.00-0.36 504.50-0.25 504.50-0.25 511.11 0.52 Thermal coal Q1-11 Q2-11 Q3-11 Cal 11 Cal 12 API2 (CIF ARA) 113.00-1.70 110.60-0.70 109.00-0.05 110.90-0.35 113.00 0.50 API4 (FOB RBCT) 109.50 0.20 107.60 0.80 106.10 1.35 107.50 1.10 108.00 1.00 Forwards (%) 1-month 2-month 3-month 6-month 12-month Gold 0.44600 0.48200 0.49600 0.56600 0.69400 Silver 0.56400 0.56400 0.57800 0.61400 0.65200 USD Libor 0.26250 0.28063 0.30219 0.45844 0.78250 Technical Indicators 30-day RSI 10-day MA 20-day MA 100-day MA 200-day MA Support Resistance Gold 56.17 1,389.97 1,375.11 1,300.35 1,240.59 1,371.00 1,405.00 Silver 62.34 28.42 27.59 22.48 20.27 28.00 29.30 Platinum 51.83 1,686.35 1,672.95 1,630.40 1,619.93 1,669.00 1,700.00 Palladium 61.70 728.63 705.93 582.58 532.51 718.00 743.00 Active Month Future COMEX GLD COMEX SLV NYMEX PAL NYMEX PLAT DGCX GLD TOCOM GLD CBOT GLD Feb'11 Mar 11 Jan'11 Jan'11 Dec'10 Oct'11 Feb 11 Settlement 1,388.70 28.7100 733.00 1,681.40 1,382.60 3,746.00 1,389.20 Open Interest 603,632 137,675 23,157 36,578 1,927 106,942 2,479 Change in Open Interest -63-449 379-50 -256 1,904-29 Date: 8 December 2010 Sources: Standard Bank; LME; Bloomberg Cancelled warrants (mt) Cancelled warrants (%) Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,400 16,320 65 Ali Mar'11 - - - - Copper 66,980 67,200 1,410 Cu Mar'11 410 413.90 3.85 0.94% Zinc 18,330 18,260 100 4
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