Oil inventories continued their third straight week of builds, growing by 5.5 million barrels, versus last week's 8.8 million barrels while crude again built above market expectations, at 5.7 million barrels, versus consensus of 1.6 million barrels this week. In general, the oil inventory picture looks similar to last year's: Total inventories are lower than last year but not drastically so and are still in the upper half of the five-year range, drawing less in the January to mid-April period of 2008 than during 2007.
A striking comparison shows that between May 2007 and May 2008 we have seen an 83 per cent rise in WTI crude oil prices, a 33 per cent rise in Gasoline (rbm8) and a 74 per cent rise in oil used for commercial heating. Numbers such as these tell us forces beyond fundamental factors continue to play a dominant part in dictating market prices.
On Wednesday, the market focused on the Distillates draw, speculating about the next summer season sending oil to a record high. To help the bullish run, Goldman Sachs predicted oil could go to up to $200 per barrel.
But we are calling an end to this disconnect. For now, economic growth is slowing and the oil price, even with inflation, will not be able to stay disconnected to production costs of $50 per barrel, forever. Markets often turn on a dime, and oil is one market we see falling much further and faster than most.
What strikes us of late is that these higher oil prices have been hit, even on the back of a gaining dollar, potentially leaving the door open to even higher oil levels in the case of renewed US dollar weakness.
In terms of trades, we are close to reaching our target at the $125 per barrel area after the break of $120; we will sell June WTI crude oil (CLM8) at around $126 per barrel area. Meanwhile, we missed our entry point on Natural Gas (ngm8) at 10.46 for a mere 0.02 cents. We have been advocating building a long position for quite some time. We maintain this view and will try to get in on dips, with support currently at $10.85. This market continues to trade cheaply versus the rest of the energy complex. However, while we are bullish we will hit our targets, one risk could present itself in the form of a cooler-than-expected summer.
Precious metals finding support
Higher energy prices and a weaker dollar were primarily responsible for sending precious metal prices higher with gold hitting a level not seen since April 28. After June, Comex Gold (gcm8) reached the $850 support area and held it.
We believe some investors have been re-establishing medium-term long positions and are looking for a retracement of the last downwards move between $1038.60 to $846.40 with first target at $900 and on a break up $950. This still looks good provided the 885 support is working.
Nymex platinum is currently being supported by news that a major European bank will launch platinum exchange traded notes in the United States.
This means that cash settlements will replace the physical impact of silver and gold from those exchange traded funds already in existence.
July platinum (pln8) is well supported at 2035, currently trading 2105, and technically we believe we can look up to 2150 area.
We expect volatility to dominate agricultural returns. We still believe corn will perform strongly, which would counter the seasonal pattern of negative corn returns during the summer months.
Last week was a "relief spell" for Agriculturals, bouncing from their recent lows to be pulled higher by oil's continuous rally. Devastating cyclones and the ensuing chaos in Myanmar has meanwhile been dominating headlines, sending rice price limits up for the third day in a row on fears that it would weigh on an already tight rice market, in a trend that is likely to see the price retest the recent highs, close to the $25 area. On the trade side, we entered a long position in wheat and intend to keep it. Our first target is at 848 and then the 875 area. We like Nybot Cocoa (ccn8) building but 2761 should offer resistance. A daily close above and we will go long and target 2820 and 2940. We maintain our bearish stance on Sugar (sbn8), if we see a daily close below its 200 day moving average at 11.37 currently, we will enter a short position.
- The author is a Saxo Bank strategist