Weak US economic data and potential downgrade in Greece's credit rating were pressuring commodities last week. Not until Friday that stronger-than-expected US GDP boosted market sentiment and lifted prices again.

In the US, durable goods orders rose +3% m/m in January following an upwardly revised +1.9% increase in December. However, the stronger-than-expected headline reading masked the fact that most of the gain came from aircraft orders. Excluding transportation, the reading indeed dropped -0.6% m/m, compared with market expectation of +1.1% and December's +0.9% . Core durable orders and core shipments fell -2.95 and -1.5%, respectively. The readings were weak, raising market concerns about recovery in the US.

Initial jobless claim rose to 496K from 473K in the previous week. The market had anticipated a dip to 465K. The 4-week average also rose to 474K, the highest level since early December. While the Labor Department mentioned that adverse weather might have distorted the result, we remained worried that this would translate into another month of disappointing payroll data.

Earlier in the week, the US consumer confidence surprisingly slid to 46 (consensus: 54.8) in February, the lowest level since April 2009, from 56.5 in the previous month. The labor market indicators were also disappointing. The index forecasting jobs are hard to get surged to 47.7 from 46.5, while that believing jobs are plentiful fell to 3.6 from 4.4, signaling more people expect it will be more difficult to get a job in the future.

In Europe, economic data released last week were more or less inline with market expectations. However, the deficit situation in Greece is increasingly worrisome. Both S&P and Moody's said that they may downgrade the country's credit rating in coming months.

However, on Friday, the market was boosted as the US government reported 4Q09 GDP grew +5.9% from the previous quarter (annualized), compared with preliminary reading of +5.7%.

After a volatile week, the Reuters/Jefferies CRB Index lost -1.09% to 274.77 while the US dollar index slid -0.3% to 80.36.

Crude Oil

Crude oil price rallied +1.9% to close at 79.66 Friday as upward revision in US' 4Q09 GDP growth signaled strong economic recovery in the largest oil consumer. However, after trading choppily over the week, crude oil recorded the first weekly decline following rises over the past 2 weeks.

Investors are still unconvinced to see crude oil rising above 80 level as fundamentals remain weak. Although recent rally from 69.5 (Feb. 4) brought price to as high as 80.78 (Feb. 22), profit-taking was prominent at levels around 80. Price kept trading with high volatility around 77-80 last week.

In the US, crude oil inventory rose +3.03 mmb to 337.5 mmb in the week ended February 19. This 4th week of stock build exceeded market expectation of +1.9 mmb, driven by +6% increase in imports. Utilization rate, however, rose for the second consecutive week to 81.17%. Decline in Cushing stock, where WTI crude is stored, continued. The latest reading showed that Cushing stock was reduced to 29.9 mmb, a level not seen since November, 2009.

Higher utilization and draw in Cushing stock are the 2 reasons supporting WTI crude oil price. Front end of the WTI forward curve has flattened, suggesting stronger physical demand. Widening of premium of WTI crude over Brent crude is yet a sign showing better demand outlook in the US over Europe.

Other details in the US inventory report include unexpected draw in gasoline stockpile and less-than-expected decline in distillate inventory. Gasoline stockpile, dipped for the first week in 3 by -0.9 mmb to 231.2 mmb, as demand surged +6.4% to 9.1M bpd. Distillate inventory drew -0.59 mmb, less than market forecast of -1.5 mmb, to 152.7 mmb.

The US Energy Department also released the monthly petroleum report, showing the latest monthly demand data for December, last week. It's shown that distillate demand soared +9.9% m/m and +3.1% y/y to 3.902M bpd in December. This represented modest upward revision from the average of weekly data. However, downward revisions were seen in gasoline jet fuel and other products, resulting in small upward revision in total US oil demand which rose +3.3% m/m to 19M bpd in December. The demand was almost flat from the same period in 2008 but remained below pre-crisis level.

China, the world's biggest growth driver, reported -900K bpd decline in crude oil imports in January, confirming the weak preliminary data. The drop in January more than offset the +840K bpd increase in December and signaled the impact of cooling measures by the Chinese government.

In coming weeks, we expect oil price will remain range-bounded. For the benchmark contract to sustain above 80, stronger demand from OECD countries is need. However, given weak consumer confidence data and dismal jobless claims in the US, significant demand improvement is not likely in the near-future.

Natural Gas

Natural gas was the worst performer in the energy complex last week with the April contract sliding -4.8% to 4.813 on weekly basis.

According to the US Energy Department, gas storage dropped -172 bcf to 1853 bcf in the week ended February 25. The gap between current gas storage and 5-year average was also narrowed to 0.7%. However, gas price did not rise as investors worried about the demand outlook as winter passes.

There have been renewed discussions about coal-gas substitution. Huge decline in US gas price in 2009 has motivated producers to shift from coal-fueled plants to gas-fired ones. According to BP Plc Chief Economist Christof Ruehl, 'Gas can compete with coal as an input fuel for power generation again ...Consumers will benefit if the price of natural gas is progressively delinked from the price of crude oil'.

In fact, given the abundant supply in US gas market and decline power demand in 2010, we will likely see a competition between gas and coal. The end effect is beneficial for consumers who can enjoy cheaper power costs.

Precious Metals

Despite a break below 1100 in the middle of the week, gold price managed to regain the level as driven by broad-based rally in the commodity sector. The 2-day rally on Thursday and Friday recouped much of the loss incurred earlier in the week. On weekly basis, gold price slipped -0.265 to 1118.9.

Gold plunged early last week amid strength in USD. On Wednesday, a Chinese newspaper reported Chins has no interest in buying gold from the IMF. This further depressed investors as the market had hoped central banks from emerging markets would absorbed IMF gold sales. On Thursday, a Russian industry website said that China 'has confirmed' buying IMF's 191 metric tons of gold. While both news were not verified by Chinese government officials, we believe China will increase its gold reserve through acquiring gold mines, rather than buying from IMF, unless price is very attractive.

Although we remain long-term bullish in gold, the precious metal is expected to be range-bounded in the near-term. On one hand, USD remains firm against major currencies. Budget deficit problem in the Eurozone should keep the euro under pressure. Although sovereign crisis should benefit gold, recent price movement indicates that investors flee to the dollar and Japanese yen, rather than precious metals. Moreover, global inflation remains benign. The situation does not only happen in advanced economy but also fast-growing China. The world's locomotive for growth's CPI rose +1.5% y/y in January, moderating from +1.9% y/y in the prior month.

On the other hand, decline in gold price spurs physical buying. India's gold imports have increased in recent months as gold price plunged from record high in December. However, potential imposition of import duties will likely have negative impact of imports. In its 2010/11 budget report, the Indian government proposed to raise import duties on gold by +50% to INR 30.9/g from INR 20/g.

PGMs' outlook remains robust. The Chinese government has planned to raise subsidies for vehicle purchases in rural areas. Increase in auto demand should help boost PGM consumption.

Base Metals

Base metals generally fell in tandem with others in the commodity sector as economic data in the US fuelled worries about consumption outlook while the Greek debt situation weighed on broad market sentiment.

The most positive news last week was strong demand nickel and zinc in China. The country's trade data showed that nickel and zinc imports rose +98% m/m and +176% m/m, respectively, in January.