Trading was relative light in the commodity sector as investors continued to gauge the implications of macroeconomic indicators and government officials' comment on global economic outlook. Despite broad-based decline in risk assets, the dataflow was not entirely poor last week. US' industrial production rose +1% m/m in July after contracting -0.1% a month ago while UK's retail sales and net borrowing showed signs of improvement. Unfortunately, the market only focused on the weak side of the economy and reacted vigorously when US initial jobless claims surprisingly rose to 500K in the week ended August 14 from an upwardly revised 488K in the prior week and ECB member Axel Weber signaled stimulus should stay for the rest of the year.

Crude oil

Crude oil declined for 4 out of 5 days last week as US oil and petroleum products recorded huge increase in inventory while fuel demand was disappointing. Weaker-than-expected economic data and ECB's signal of lengthening stimulus measures exacerbated concerns about global slowdown of recovery in the second half of the year. The font-month contract for WTI crude oil price plunged for a second week, by -2.51%, to settle at a 6-week low of 73.82 while the corresponding Brent crude contract slipped -1.13% to 74.26.

Spread between WTI and Brent crude price also evidenced weakness in the US economy. The following chart shows that the WTI-Brent spread fell to negative territory again on August 17. The level at -$1.16/bbl was the lowest since Jun 17. In fact, WTI crude oil should trade at a premium to Brent crude given its lightness and sweetness. However, the pattern fluctuates depending on the demand and supply balance in the market. In 1Q10, WTI crude had been consistently trading at a discount to Brent crude as US oil inventory, especially stockpile at Cushing (where WTI stock is stored), jumped to record highs. The situation eased later as economy recovered in the US and improvement in demand helped absorb excess inventories. Yet, the market has been debating on WTI crude's eligibility of being an international benchmark of crude oil price given the high volatility and ample supplies.

While the market has been focusing on economic slowdown and the potential impact on demand, few paid attention to the supply outlook. Last week, Sudan's Petroleum Minister Lual Deng hopes to increase oil production by 35% in 2011. The second largest non-OPEC African crude oil producer aims to boost production to 360Kbpd in 2011 as China, European and some Arab investors are increasing investments in the country.

According to EIA's statistics, African oil production presents an average of 13% of world's production from 2004 to 2009. In fact, there are 4 African countries countries Nigeria, Angola, Algeria and Libya) in OPEC, contributing over 20% of production in the cartel. If Sudan succeeds in boosting production in 2011, the importance of Africa in global oil supply should further increase.

Nigeria is the biggest oil producer in Africa but facilities in the region have been under attack by militant groups among which the biggest is the Movement for the Emancipation of the Niger Delta (MEND). In the past, news regarding destruction of oil facilities in Niger Delta was catalyst boosting oil prices higher as this suggested tighter supply. However, as OPEC has accumulated abundant spare capacity since the 2008 recession, temporary disruption in the region does not have much impact on the overall picture.

Natural Gas

Underperforming others in the energy complex, gas price slumped -4.88% to 4.117 last week. Natural gas storage gained +27 bcf to 3012 bcf in the week ended August 13. The addition was lower than consensus forecasts of +32 bcf and last week's +37 bcf. Currently, the stock level is -185 bcf below the same period last year and +196 bcf, or +7%, above the 5-year average of 2816 bcf.

Despite the smaller-than-expected inventory build, Nymex gas price slipped in tandem with its energy counterparts with the front-month contract plunging to 4.14, the lowest in almost 3 months, before settling at 4.17, down -1.60%. While the broad-based worries about a double-dip recession is a main reason, price declined as seasonal catalysts pushing demand higher seemed to have disappeared this year. The weather is mild. Meteorologists forecast that temperatures will be in a normal range in the eastern US through August 27. Mild weather is expected to reduce fuel consumption in power plants. Moreover, thunderstorms seem to have less impact on oil supplies in the Gulf of Mexico so far this year.

Baker Hughes' data showed that the number of US rigs dropped for the first time in 3 weeks. Rig counts fell to 985 units in the week ended August 13 after soaring to a 18-high of 992 units in the prior week.

Precious Metals

Despite a fall on Friday, gold recorded gains for a third straight week as intensifying uncertainty in global economic outlook spurred demand for safe-haven demand. Settling at 1228.8, the rally from 1155.6 on July 28 remains intact and recent market sentiment should propel the metal to a test of record high - 1266.5. Apart from investment demand induced by the need of safe assets, physical buying should also support price. In India, Raksha Bandhan (August 24) marks the start of the country's festive season. Gold buying should increase all the way through Dhanteras in November.

Others in the precious metal complex slipped as demand for silver and PGMs are closely tied to the economic cycle. Yet, we remain bullish on PGMs and see the possibility that PGM prices will outperform gold later this year Recovery in US's auto sector has surprised to the upside and the positive should continue in 2011 The market forecast global car sales will grow by around +10$ y/y in 2010 followed by a slower growth of 2-5% in 2011. Given the low car inventories after several quarter of heavy destocking, the rise in auto sales should boost production, hence, PGM demands.

Base Metals

Performance in the base metal complex was mixed last week. While copper, zinc and nickel gained modestly, others recorded losses of 0.05-3.3%. Notwithstanding signs of macroeconomic slowdown, inventory for base metals (esp. copper) has been contracting. The situation, compared with the traditional trend of huge stock builds during summer time - June-August, indicates stronger-than-expected summer demand. That said, we remain cautious on price outlook in the medium-term amid deflationary concerns in advanced economies as well as slowdown in Chinese growth.