Early last week, worries on credit tightening by the Chinese Government triggered selloffs in risky assets. In the commodity universe, the base metal complex got the biggest hit as the government's massive stimulus plan has encouraged expansion in various industries. Should the government tighten lending, many projects may have to be postponed or cancelled.

However, later in the week, strong macro economic data boosted sentiment again and improved market sentiment helped commodities pared some of the losses made earlier. However, the Jefferies/Reuters CRB Index still lost -0.6% over the week.

Crude Oil

Crude oil price rose for the second consecutive day last Friday as encouraging economic data in the US increased market confidence on demand outlook. The benchmark contract added +0.3% to settle at 72.74. However, on weekly basis crude oil price still lost -1.9%.

Despite a test of 75 Tuesday, strong profit-taking pressure was seen as investors probably did not believe oil fundamentals justify crude oil at such high level. Inventory reports from API and US Energy Department, both showed significant crude builds, confirmed that the demand/supply outlook remained weak. This pushed oil price lower. On Thursday, buying interest emerged at level of around 70.Driven by robust market sentiment and rebound in stock markets, the black gold managed to pared some losses made earlier in the week.

WTI crude oil price will likely move within a range of 65-75 in coming months. It's undeniable that fundamental outlook has improved in recent months when compared with the first and second quarters of the year. Look at US inventory level, crude stockpiles dropped to 343.76 mmb in the week ended August 21, down -1.2% from 347.84 mmb 4 weeks ago and -8.4% from the peak (375.26 mmb) made in the week ended May 1. Gasoline inventory has also shown a decreasing trend.

However, the major worry is in distillate stockpile which has gained +19% year-to date. Moreover, the current level represented the highest level since 1985.

Furthermore, we believe the market should not overplay the improvement in fuel consumption. As we mentioned in the previous weekly report, despite the rise, fuel demand remained significantly below the level seen last few years.

In short, the current fundamentals do not justify a rise above 75.

However, positive economic data and signs of recovery will continue to prevent price from declining sharply. Second estimate of US GDP indicated that the nation's economy contracted -1%, same as the first estimate but better than market expectation of -1.4%. The reading points to a stronger third quarter.

Natural Gas

The October contract dropped -5.4% to 3.03 Friday although others in the energy complex climbed higher. Mild weather in the US, weak industrial demand and increase in production continued to put heavy downward pressure on price. The contract sank -6% over the week.

Demand for electricity accounts for around 29% of US gas consumption. However, the observatory forecast temperatures will be normal to below-normal and this greatly reduced the need for air-conditioner and hence lowered electricity demand.

According to Baker Hughes, the number of gas rigs increased for the 6th consecutive to 699 in the week ended August 28.

Precious Metals

Gold price surged +1.2% to settle at 958.8 Friday. While decline in USD and strength in stock markets helped supported price, data from ETF Securities showing that gold assets in the funds rose to a record high excited investors.

Look at the data provided by ETF Securities, gold holdings in its ETFs reduced after reaching a peak in June 2009. The decline was probably driven by diminished expectation on inflation and rather stagnant movement in USD. However, impressive capital inflows have been seen again early last week. Strong buying interest pushed gold holdings to 7989M oz as of August 27, the highest level on record.

Although asset holdings remained sluggish in SPDR Gold Trust, demand may rise should this round of investment inflows prove sustainable.

Silver soared +4% to 14.78 Friday. Over the week, the 'hybrid' of precious and industrial metal gained +4.4%, outperforming gold's +0.4% gain. Year-to-date, silver has risen +31% while gold has gained +8.4%. Looking into details, silver has outperformed gold in each of the quarters. In 1Q09, silver rose +15% while gold gained +4.6%. In 2Q09, silver rose +4.7% but gold only edged +0.26%. In 3Q09, silver has so far risen +8.7%, compared with gold +3.4%. While silver's underperformance in 2008 made it look relatively cheap this year, silver's major applications in industry and photography spurred demand as global economic outlook turns better.

Base Metals

Broad-based rally was seen Friday with LME lead for 3-month delivery jumping +4.8% to close at 2107. Over the week, lead was the best performer, gaining +14.1%, as closures of smelters in China spurred worries on supply.

2 smelters in Shaanxi and Hunan have been closed as over 2000 children living nearby were found to have excessive levels of lead in their blood. The market also worried that the Chinese government's stricter oversight on outdated lead smelter capacity would put further pressure on supply.

Both we and experts in the industry believe that the concern is overblown. Smelter capacity in China, the country that accounts for 35% of global lead production, is excessive as many plants are idle or with low utilization. Closure of substandard plants will not only eliminate excessive capacity but also encourage smelters that are environmentally friendly to be put in operation.

However, if the concern lasts, we think the next beneficiary would be zinc as around 8% of China's zinc supply comes from smelters also producing lead. If the shutdowns become widespread, zinc production will also be affected. Last week, LME zinc for 3-month delivery rose +2.6%.