Crude Oil Climbs but Remains Below 82 ahead of Inventory Data

Crude oil's recovery was capped below 82 as investors remained cautious about risk-taking. Sovereign crisis in peripheral European economies remains a big concerns, S&P's downgrade of Ireland's ratings indicates a bailout may not be able to solve the country's underlying problems. Meanwhile, the risks of contagion intensified with Portugal the next country expected to seek rescues. Gold price remained firm with the benchmark Comex futures hovering around 1380. Tensions on the Korean Peninsula have remained an overhang in the near-term.

Market sentiment has been dominated by macroeconomic and geopolitical tensions, overshadowing economic data which were rather encouraging. Yesterday, the US government upgraded GDP growth for 3Q10 to an annual rate of +2.5%, beating consensus of +2.4% and initial estimate of +2%. In European session today, IFO reported that Germany's business climate index rose to a record high of 109.3 in November from 107.7 a month ago. 'Current assessment' index and 'expectations' index also improved to 112.3 and 103.3 from 110.2 and 105.2 respectively.

The FOMC minutes for November were published yesterday. Few surprises were delivered so market reactions were not strong. The Fed released latest projections with GDP estimated to rise at 3-3.6% in 2011 versus prior forecast of 3.5-4.2% released in June. Unemployment is projected to be at around 9% by end of 2011, higher than prior projection of 8.5%. Inflation is expected to stay below the informal target of 2% through 2013. Policymakers had diverse opinions on the $600B asset-buying program despite the 10-1 vote. While most members expected the program to 'help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with' Fed's mandate, 'some participants noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value in foreign exchange markets'. These comments probably supported the dollar's strength.

As investors await the weekly inventory report from the US Energy Department, the industry-sponsored American Petroleum Institute estimated crude oil inventory rose +5.19 mmb to 357.73 mmb in the week ended November 19.Both gasoline and distillate stockpiles fell -0.50 mmb and -0.31 mmb respectively. The market forecasts the official data today will show drops in crude oil, gasoline and distillate inventories.

Weekly change in inventory as of 19/11/10

Comparison between API and EIA reports: Forecast (using API's inventory level)

API collects stockpile information on a voluntary basis from operators of refineries, 76% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

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