JEDDAH — Crude prices remained in slower downtrend through October and early November, Al Rajhi Capital said in its “Economic Research” last October. The report noted that the Brent crude price has eased around 3 percent from its level in early October which is trading currently at around $109 million barrels per day. Crude oil prices dropped Friday as a backdrop of weak energy demand offset potential supply risks caused by geopolitical tensions in the Middle East fuelled by Israeli air strikes in the Gaza Strip. New York's main contract, light sweet crude for delivery in December fell 36 cents to $85.09 a barrel. Brent North Sea crude for January delivery dropped 18 cents to $107.83 in London midday deals. WTI Nymex crude price has declined sharply by 6.5 percent to $86 mbpd over the last one month resulting into widening the gap between the two crude price measures. The spread between Brent and WTI stands at around $23 per barrel, highest in 2012. The sharper decline in WTI prices was mainly due to increasing supply in the US. According to OPEC estimates, world crude supply increased by 1.01 mbpd in October – non-OPEC supply increased by 1.08 mbpd whereas OPEC supply declined by 0.07 mbpd. Crude production in Saudi Arabia has also been easing which was slightly lower than 9.7 mbpd in October, the report said. According to Commodity Future Trading Commission (CFTC) data, commercial participants increased their long position by 6.3 percent whereas they decreased short position by 3.1 percent. However, overall they remained net short in the future market last month. Note that they held net short position in September as well. On the other hand, financial investors increased their short positions by 10.6 percent over the month keeping long positions almost unchanged. However, overall they held net long positions. Al Rajhi Capital forecast that the down trend in the crude oil price is likely to continue as supply has been decent in the wake of slower demand growth. The positive data surprises in the US over the last one month have not been able to turn around the downward trend. Having said that, improving data has prevented sharper downtrend. Stabilization in the Chinese growth could be another support for the commodity along with peak in seasonal demand in winter in the near term. In precious metals, trend in gold prices has been downward over the last one month. However, the trajectory of the price was volatile over the period as it swung from $1792 per ounce (highest in 2012) in early October to low of $1678 per ounce on 2nd November. Currently the precious metal is trading at around $1730 per ounce. The part of the volatility was due to movement in the broader US dollar index which also oscillated between 79 and 81. The US dollar was also volatile against euro as the trading range was 1.27-1.31 per euro. The relationship with global equity movement was slightly weaker during the period. The correlation coefficient was 58 percent compared to long-term correlation of 75 percent. In the future market, over all open interest for the precious metal declined by 7.1 percent in October compared to previous month. The commercial participants decreased their short positions by 9.8 percent even as they continued to hold overall net short position in the future market. Non-commercial participants held net long positions. However, they decreased their long position by 11.2 percent and increased their short positions by 6.3 percent in October compared to September positions. The current global situation could play either way for gold in the near term. The higher uncertainty around fiscal cliff has caused higher volatility in global financial world. It is expected to continue. However, if the solution of the fiscal cliff comes in favor with smaller drag on the economy, equity is likely to do well. This translates into gold also moving up as the two have positive correlation. Silver has declined rather sharply since the beginning of October- down more than 6 percent. However, it continues to outperform Gold and equity on year-to date basis. The white metal is up 17 percent this year compared to gold which is up 10 percent. In future market, commercial participants held net short position and non-commercial participants held net long position. Nonetheless, major central banks in the world stayed put on monetary policy over their last respective meetings. Federal Reserve reiterated its plan to continue to purchase mortgage backed securities worth of $40 billion per month along with a pledge to keep interest rate at current low level till mid 2015. European Central Bank also kept its policy rates unchanged whereas it downgraded economic outlook for the Euro Area. The central bank reiterated that the policy announcements made earlier such as Outright Monetary Transaction have been effective as strain in financial system in the area has eased. Bank of England also stayed put even as it reached its limit of £375 billion asset purchase program. This means that the UK economy does not have any additional monetary stimulus at the moment. Bank of Japan added JPY11 trillion to its ongoing bond purchase program. The improvement in global financial strain is reflected through softening in interest rates. London Interbank offer rate (LIBOR) has been easing since January this year after European Central Bank took liquidity injection measure through two legs of Long Term Refinancing Operation (LTRO) – one in December 2011 and second in February 2012. The measure injected more than EUR1 trillion into banking system for three years. This calmed the nerves in financial system from liquidity point of view and caused interbank rates to turn around which was rising. Since then interbank rates have eased, however, $ Libor rates remain higher thantheir respective lows of the last year. $ Libor for 1-year is currently quoted at 0.8755 percent which is lower by 26bps compared to its peak in January this year. However, as stated it remains higher than the lows attained in June 2011 when the rate was 0.7205 percent. Similarly, the rate for 3-month has eased by almost 27bps from its peak in January to currently at 0.3125 percent. However, this also remains higher than lows of June last year which was around 0.24 percent. In normal circumstances, LIBORs move in sync with policy rates set by central banks. This is reflected in the largely stable spread between yield on 3 months US Treasury Bills and 3 months $ LIBOR over the last decade except during financial crisis. The average spread between the two was 17bps during January 2003-July 2007. The period was marked by relative stability in the global financial system. The average spread has been higher at 28bps during the post financial crisis period between Sep 2009 and now. The average in this period has been pulled up by a relatively higher spread during European sovereign debt crisis in 2010 and H2-2011 and H1-2012. The spread between LIBOR and 3 month treasury yield is regarded as risk premium for AA rated interbank rate compared to AAA rated treasury securities. At the moment, this risk premium is slightly higher than the long term average which typically converges to this average under normal risk appetite and liquidity conditions. Now the 3 month Treasury yield has been hovering around its average of 0.09 percent (March 2009 and now). This means that normalization in the spread between LIBOR and T bills yield is likely to happen through movement in the first. This suggests that there is some more room left for interbank rates to ease further provided risk appetite and liquidity conditions remain normal. Additionally, liquidity condition is expected to remain comfortable and deterioration in risk appetite due to two major issues (Fiscal cliff and Euro area sovereign debt issue) is unlikely to increase the spread. Meanwhile, Chinese refiners have finalized annual crude supply deals for next year with OPEC producer Kuwait at volumes steady with this year, but at least one company has agreed to take more oil from top exporter Saudi Arabia, trading executives said Thursday. Most oil exporters count China among their top buyers as the country has led global oil demand growth for a major part of this decade with a booming economy boosting consumption. China's refining capacity is slated to rise 1 million barrels per day (bpd) this year. — SG
