Crude oil rallied to as high as 81.23 before ending the day at 80.87, up +1.4%. The rally, despite the poor inventory report, was driven by strong US ISM data and weakness in USD. As market sentiment has improved, crude oil price once again derailed from fundamentals and displayed high correlation with the stock markets.

A report by the US Energy Department showed that crude oil inventory surged +4.03 mmb, compared with market expectation of +1.9 mmb gain, to 341.6 mmb in the week ended February 26. Cushing stock, halting the downtrend, rose for the first time in 10 weeks. Although utilization rate increased +0.7%, it was more than offset by +2% rise in imports.

Gasoline inventory rose +0.77 mmb to 231.9 mmb despite decline in imports and flat production. Demand slid -2% to around 8.88M bpd. Distillate stockpile continued to draw but the magnitude was less than expected. Although demand rose +4.6% during the week, it remained +21% above 5-year average.

The set of inventory data is far from encouraging but investors ignored fundamentals and pushed oil price higher as the US reported stronger-than-expected ISM services data and an upbeat Beige Book.

The February ISM services index rose to 53 from 50.5 in the prior month. The reading exceeded market expectations of 51 and was the highest level since October 2007. Looking into details, the employment component climbed to 48.6 (previous: 44.6), suggesting payroll contraction in the services sector is moderating.

The Fed said in its monthly Beige Book that 9 out of 12 regions saw economic improvement during the period through February 22. There was 1 region, Richmond, reported weakening in economic activities but this was due to severe snowstorm. Sector-wise, non-financial services were 'steady or improved' while manufacturing activities 'increased further'. The biggest concern remained to be employment. The Fed said 'hiring plans remained generally soft'.

Weakness in USD also increased appeal for commodity investments. Greece's new austerity measure to reduce budget deficits eased worries on the country's default risk. However, we doubt the effectiveness of plan and wonder if it can be implemented successfully, given oppositions from citizens. Moreover, investors who thought Germany will discuss with Greece about bailout in the meeting this week will be disappointed as the German Chancellor Angela Merkel said Friday's meeting will not be about aid commitment but about good relations between the 2 countries. However, the Chancellor added that Greece's measures are an important for restoring confidence in the euro.

Gold rose in tandem with others in the commodity sector. The benchmark contract soared +0.5% to 1143.3. Gove price movement these days signal the metal has emerged from its recent 'range-trading' mode. As EURUSD and gold price are directly correlated, rebound in euro should lift gold higher. According to CFTC's commitments of traders report, net short positions in the euro have been testing new records in recent weeks. Squaring these positions should boost the euro and, indirectly, gold price. Funds flowing out from US assets also supported gold price.

Others in the precious metal complex also rallied with silver rising +1.6%, platinum +0.6% and palladium +1.3%.