Movement in commodity prices was directed by macroeconomic development last week. Overall, investors have turned more confident about recovery in the US and less concerned about sovereign crisis in Greece.

Apart from 4 central bank rate decisions, focus of the week was US employment report. The Labor Department said the number of non-farm payrolls contracted -36K in February while January's reading was revised to -26K. Unemployment rate stayed at 9.7%, compared with market expectations of 9.8%. The market interpreted the result as positive and hence commodities rallied.

Over the week, Reuters/Jefferies CRB Index gained +0.8% to 276.93 while the dollar index edged higher by +0.09%.

Crude Oil

Crude oil rallied after fewer-than-expected payroll contraction in the US. Investors anticipate improved economic outlook would boost energy demand. WTI crude oil price surged to a 7-week high of 72.07 before closing at 81.5, up +1.6% Friday. The benchmark contract also added +2.3% on weekly basis. Brent crude also rose +2.96% last week, narrowing the spread between WTI-BRENT crude prices. We believe this was due to the unexpected stock build in Cushing Oklahoma, where the WTI crude is stored.

The US Energy Department reported on Wednesday that crude oil inventory increased +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.

We regard this as a weak set of inventory data. However, the market ignored the huge increase in crude oil inventory but focused on strong ISM services data and other positive macroeconomic data. Moreover, investors might view increase in utilization rate and rise in implied petroleum consumption as signs of recovery in US oil market.

The weekly data is volatile in nature. Let's take a look at the 4-week average. Total product demand averaged at 19.3M bpd over the past 4 week, down -1.2% from the same period last year. Although the contraction has moderated, it's far from being described as encouraging. Similar situations are seen in fuel demands. 4-week average for motor gasoline and distillate were down -2.5% and -7.7% respectively from the same period last year.

In the coming week, the International Energy Agency, the US Energy Department and the OPEC will release their monthly oil reports. We expect to see modest upgrade in global oil demand given stronger macroeconomic outlook. Major growth driver remains in countries outside OECD. In previous reports, all 3 agencies viewed that OECD demand should remain subdue in 2010 and 2011. We will see if there're any upward revisions in these countries as OECD demand is crucial for sustaining oil price above 80.

Natural Gas

Gas price initially extended weakness to 4.54, the lowest level since December 2009 but then pared losses after the positive US employment report. The benchmark contract closed at 4.593 Friday, losing -4.6% on weekly basis.

The US Energy Department reported gas inventory drew -116 bcf to 1737 bcf in the week ended February 26, while analysts had anticipated a bigger drop by -130 bcf. Investors were disappointed as current level of inventory is +1.2% above 5-year average. As winter is going to end soon, gas consumption will likely drop. The above-normal gas storage may put further downward pressure on price.

In its weekly report, the US Energy Department said that strong supply outlook in the US is the key reason for depressed gas price. 'Domestic production, specifically supplies from unconventional gas fields such as the Marcellus Shale in the Northeast/Appalachia region and the Haynesville Shale in Louisiana, has not declined substantially despite reductions in overall rig counts compared with this time last year'.

Since December 2009, natural gas inventory has been declining and narrowing the gap between 5-year average. However, the level of contraction has been disappointing as it's abnormally cold this winter.

According to Baker Hughes, the number of gas rigs increase 21 units to 926 units in the week ended March 5. Compared with the low at 665 in mid July 2009, it's an increase of +36%.

Precious Metals

Although historical data suggests March is one of the worst months for gold price movement, the yellow metal managed to rise last week. A break above 1130 (benchmark contract) has also turned the technical outlook more bullish.

Rise in gold price was driven by broad-based rally in commodities and improved market sentiment. Earlier in the week, the RBA raised the cash rate by 25 bps to 4% while the BOC delivered more upbeat economic outlook despite no change in the policy rate. These pushed 'risky' currencies higher and weighed on USD. Although the dollar rebounded as both the ECB and BOE left interest rates unchanged and the ECB stepped up to withdraw liquidity, risk appetite was still strong as investors seemed to be less worried about Greece's deficit problem.

Greece announced an additional 4.8B-euro austerity measure to reduce the country's budget deficit. The plan includes raises in tobacco, alcohol and sales taxes which are expected to increase government revenue by 2.4b euro. The government will also reduce salary bonuses to civil servants by -30%. Although the measures have angered pensioners, drivers and civil servants who marched to the finance ministry and went on strike, Prime Minister said that these measures are necessary so as to avoid catastrophe, showing the government's determination to reduce the 300B-euro budget deficits.

We are also impressed by gold's rally despite the +0.09% gain in the dollar index but suggest investors to be cautious about profit-taking in the coming week.

Within the precious metal complex, palladium was the best performer. The benchmark contract for palladium rallied more than +10% to close at 476.7, the highest level in 20 months.

A major application of PGMs is as autocatalytic converter. In 2008, the proportion of PGMs then went into autocatalyst out of total demand was 42% for platinum and 49% for palladium. In 2009, as a result of collapse in auto market, the proportion for platinum dropped to 28% while that for palladium slid to 45%. Resilience in palladium demand has probably been driven by strong recovery in US and China auto markets. These 2 countries rely heavily on gasoline vehicles which require more palladium-autocatalyst than platinum ones.

Base Metals

Base metals generally performed well last week although February manufacturing data were disappointing. Rise in market sentiment and worries over supply disruption after Chile's earthquake boosted prices.

China's manufacturing PMI slipped to 52 in February from 55.8 in the prior month. The reading was also lower than market expectation of 55.2. Similar survey compiled by HSBC showed a decline to 55.8 from 57.4. The reading indicated the government's measures are taking effect and economic growth may begin to stall. US' ISM manufacturing index also dropped to 56.5 in February from 58.4 a month ago. These might signal moderation in recovery of the manufacturing sector.

However, LME data continued to show inventory draws as cancelled warrants rose. Zinc and nickel were the best performers last week. Zinc inventory dropped -600 tons to 540 700 tons while nickel inventory fell -2340 tons to 160 884 tons. We believe decline in stockpiles was the main reason for price rallies.

Mine operations return on track gradually after Chile's 8.8 magnitude earthquake on February 27. Codelco said the Andina mine was back to full production. At the same time, most ports in San Antonio and Valparaiso have returned to normal.