WTI crude oil for December delivery retreated after faltering below 71.77 today as the 10% rally Tuesday triggered some profit-taking and Obama’s victory was positive for the dollar. Currently trading at 67.70, there’s no clear direction for the black gold’s outlook and we think it’s likely to trade within recent range below 71.77.
Demand continued to be the main concern. US auto sales slumped 32% in October, the lowest monthly total since January 1991, with limited loan access and reduced consumption due to weak economy being the main causes. General Motors reported a 45% drop; Ford Motor reported a 30% drop in car and light-truck sales; Toyota Motor also declined 23%.
On the supply side, some OPEC members announced they have cut production significantly. Algeria’s energy ministry ordered a reduction of output by 71,000 bpd as of Nov 1 whereas Nigeria has canceled at least four crude cargoes originally scheduled to load in November and December.
Some of the new president’s policies were negative for oil. For instance, Obama favored a windfall profit tax on petroleum producers and promised to boost renewable energies.
Today, the market is waiting for EIA’s weekly inventory report. According to Bloomberg survey, analysts expected last week’s inventory for crude oil and distillate increased by 1mmb and 1.55 mmb respectively. However, they expected gasoline stockpiles to fall by 0.65 mmb.
Stock markets were mixed today. In Asia, the MSCI Asia Pacific Index added 4.6% to 94.36, paring its decline this year to 40 percent. Nikkei advanced for a second day, gaining 4.5% to 9521.24. Investment sentiments turned positive after Obama won the election with a big margin which suggested a stable government and that the president can carry out the policies more easily. On the other hand, European stocks fell for the first time in 7 days as ArcelorMittal and Carlsberg reported poor 3Q earnings. FTSE, CAC and DAX dropped 2.68%, 2.76% and 2.13%, respectively.
Gold declined in Asian and European sessions as investors believed Barack Obama’s presidency and Democrat’s gains in Congress would speed the dollar’s recovery against the euro. The precious metal for December delivery plunged to 755.7 (low: 750.8) after rising to 770. We expect price would continue to trade within range of 681 and 778.3 in recent days. The greenback climbed against the Euro, Sterling and Aussie.
Apart from election results, there are several factors supporting the dollar. US interest rate reached 1% after the 50 bps cut in FOMC meeting last week and other countries are going to catch up with the trend. ECB and BOE will announce rate decision Thursday (Both are expected to cut by at least 50 bps). The market has been talking about G7 ZIRP - zero interest rate policy. Convergence of yields removed one disadvantage of USD.
Moreover, the Euro zone should be more exposed to Eastern Europe bank debt than the US or Japan. Reasons pressures faced in Eastern Europe made investors cast doubt on the durability of the Euro zone monetary union.
Although investors are cheered by the Democrat’s victory, long term impacts of Obama’s government to gold prices are uncertain. While we believe the current result is positive for the dollar, recovery of economy, improved business investment (expansion in industrial production) and consumer spending (jewelry consumption) would spur demand for the precious metal.
By OilNGold
