Tuesday, 30 December 2014

Oil N' Gold Focus Reports

Newsletter 36

Basic Trading Concepts Defined

Weekly Fundamentals - Divergent Comments over Oil Decline Signal Divergent Monetary Stances.

The December FOMC meeting indicated that the Fed remained optimistic over the US growth outlook. It maintained the growth outlook unchanged but revised lower the unemployment rate outlook for 2015 and 2016. Headline inflation outlook was revised lowered for this year and 2015. As mentioned in the statement, "economic activity is expanding at a moderate pace" while "underutilization of labor resources continues to diminish". Inflation "has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices". Meanwhile, "market-based measures of inflation compensation have declined somewhat further". Policymakers talked about the recent decline in oil prices in the press conference, indicating that it should have a transitory effect on inflation and would stimulate growth.

While the Fed judged that falling oil prices should fuel US growth, the ECB was concerned that the decline would drive Eurozone's inflation rate below 0%. ECB's Praet suggested that "given the potency of the current oil-price shock, the risk is that inflation may temporarily fall into negative territory in coming months". He added that "any central bank would prefer to look through a positive supply shock. After all, lower oil prices boost real incomes and may lead to higher output in the future. But we may not have that luxury at present". For Japan, the drop in oil prices has also complicated BOJ Governor Kuroda's task of bring inflation back to the +2% target. The selloff in oil prices suggested that it would be challenging for the country's inflation to pick up in the first half of the fiscal year starting in April.

These comments showed that the collapse in oil prices would widen the growing divergence between the Fed's monetary decision and that of other central banks, such as the ECB and the BOJ. Such divergence would accelerate the strength of the US dollar vs other major currencies.

Nymex natural gas future slumped to the lowest level in a year as investors were concerned about over production of the commodity. Mild weather in the Northern hemisphere also curbedl buying interest. The contract for January delivery plummeted to as low as 3.444 on Friday and lost more than -8% on weekly basis. On the contrary, natural gas stock ETF rose along with the US stock market. The DOE/EIA reported that gas inventory dropped for the 5th consecutive week, by -64 bcf, to 3 259 bcf in the week ending December 12. Stocks were +6 bcf higher than the same period last year and -258 bcf below the 5-year average of 3 553 bcf. Separately, Baker Hughes reported that the number of gas rigs slid -8 units to 338 in the week ended December 19. Oil rigs slipped -10 units to 1 536 while miscellaneous rigs stayed unchanged at 1 unit. The total number of rigs dropped -18 units to 1 875. Directionally oriented combined oil, gas, and miscellaneous rigs fell -1 unit to 195, horizontal rigs slid -11 units to 1356 while vertical rigs dropped -6 units to 324.

Reference: Action forex

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