Weekly Commodity Update
Market activity this past week has primarily been driven by the U.S. earnings season and the wait for the outcome of the European bank stress test.
Corporate USA generally delivered Q2 results at or above market expectations which in turn kept stock markets supported. On the flip side FED Chairman Bernanke said that the economic outlook remains unusually uncertain, but was ready to act. With midterm election coming up continued soft US numbers could trigger some additional policy action.
Meanwhile in Europe the long awaited release of the European bank stress test kept the market guessing about the outcome. Skepticism about the usefulness of the report emerged as the important questions might not be asked: how banks will perform should a weak nation be forced to realign its debt and what would happen if the recession deepens. A credible number of failures among the 91 banks being tested needed to be the result, otherwise the whole exercise would suffer the risk of backfiring leading to renewed risk aversion.
Commodities had a generally quiet week with the Reuters Jefferies CRB gaining one percent primarily on the back of a strong rally in copper, crude and sugar. Sell offs in Cocoa, coffee and corn limited the upside gains. The index has now rallied eight percent to 267 from the May low but will be finding resistance towards 270.
The International Energy Agency, who is an energy adviser to most of the world’s biggest economies, said that China had overtaken the US as the world’s largest consumer of energy. In their calculation all forms of energy such as crude oil, nuclear, coal, natural gas and renewable sources were used. Just ten years ago Chinas total consumption was just half the size of the US and it highlights the phenomenal speed of the economic progress of that nation but also how important a factor they are in determine the cost of various energy sources
When it comes to crude oil demand the U.S. is still well ahead as they consume an average of 19 million barrels a day compared to Chinas 9.2 million barrels a day. Chinas power production relies heavily on coal which accounts for 80 percent of its production. Still Chinas oil demand rose to a fresh record high in June and is ten percent above the same period last year.
Crude Oil has gone into a summer lull trading inside a relative tight range and primarily taking direction from outside markets such as the dollar and stock markets with the above China story also having a bit of positive impact.
Meanwhile in the US crude oil inventories unexpectedly rose last week increasing the doubt about a recovery in consumption. Inventories at Cushing, the delivery hub into NYMEX rose to 37.1 million barrels, less than 1 million barrels short of the previous record at 37.9 back in May. Demand for VLCCs (Very Large Crude carriers) has picked up again after recent surplus of tonnage has been putting charter prices under pressure. Operators of super tankers are still complaining about little or no profit being made at current subdued prices.
Crude oil have now spent the past couple of weeks trading sideways as the speculative long position remains pretty small at 35,000 which is s
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