Oil

Oil prices hit their highest in almost six months on April 26, with the global surplus expected to shrink in the second half of 2016.

International benchmark Brent crude rose above $47/barrel, while US marker West Texas Intermediate topped $45/barrel — the highest since November.

Commercial crude oil inventories rose for a third consecutive week, up 2m barrels to 540.6m barrels, US energy department data to April 22 showed. Crude stocks at the Cushing, Oklahoma, delivery hub rose by 1.75m barrels.

Oil prices have rebounded since sliding to a 13-year low in January, boosted by signs of global supply and demand coming into balance. This has prompted a rush of new investment into crude futures, with speculators raising their holdings to a record high.

In recent weeks stoppages in Kuwait, Libya and Nigeria in oil production have provided support to the oil price. Dollar weakness has also helped boost oil market.

Crude futures pulled back from 2016 highs early on Thursday as traders sought profits after April’s sharp rally, but analysts said falling US oil production and strong investor appetite could push prices higher.

International Brent crude futures were trading at $47.02/barrel at 0045GMT, down 16 cents from their last settlement, and US West Texas Intermediate (WTI) futures were down 12 cents at $45.21/barrel.

The price dip came after both crude benchmarks hit 2016 highs the previous day in what has been one of the steepest price rises in recent years. Both Brent and WTI have rallied more than 70pc since their respective 2016 lows in January and February.

The slowdown in oil demand in China has been one of the chief concerns. However, its oil imports could be rising once again. In the first quarter of this year China placed about 787,000bpd into its strategic stockpile. Overall, as of March, China imported around 7.7mbpd.

Another source of additional demand comes from a policy change in its downstream sector. China loosened the rules on oil imports, allowing smaller refineries to import more crude oil.

These so-called ‘teapot refineries’, with production capacities of around 20,000-100,000bpd, struggled under the old restrictions, producing at only 30 to 40pc of capacity because of an inability to import oil. That has changed, and domestic refining production is set to rise, and with it, so are imports.

China’s additional demand for reserve requirement and higher refinery utilisation could take a bite out of excess supply.

According to World Bank’s commodities markets outlook, the oil prices could rise from $37-41/barrel as oversupply diminishes in 2016. The crude oil market rebounded from a low of $25/barrel in mid-January to $40/barrel in April.

Gold

Gold reversed losses to climb to its highest level in a week last Thursday, as the dollar slumped more than 2pc against the yen after the Bank of Japan surprised markets by keeping monetary policy steady.

At a two-day rate review ending on Thursday, the BOJ decided to maintain its pledge to increase base money at an annual pace of 80tr yen ($732bn). It also left unchanged a 0.1pc negative interest rate it applies to some of the excess reserves that financial institutions park at the BOJ.The yen soared against the dollar and euro after the announcement.

Spot gold rose to a one-week high of $1,256.60/ounce, after dropping 0.7pc earlier in the session. Traders said the metal was tracking the dollar/yen move.

Gold has rallied 17pc this year on expectations that the Fed will not raise rates aggressively this year due to global economic risks. The US central bank hiked rates in December for the first time in nearly a decade.

Last week China launched its yuan-denominated gold benchmark - with twice-daily auctions on the Shanghai Gold Exchange to fix the price of gold.

There will be 18 trading members taking part in the yuan price-setting process. In addition to Chinese banks, there are two foreign banks, Standard Chartered and ANZ, two of China’s biggest gold miners plus the world’s top jewellery retailer Chow Tai Fook.

The launch of the Shanghai exchange is being hailed as a landmark event which will challenge the century-old system of fixing the gold price in London on the London Bullion Market Association (LBMA).

One important difference between the gold fix on the SGE and the LBMA is that the SGE requires the party purchasing gold futures to deposit physical gold at the exchange.

There has been much speculation about the significance of the SGE. At the simplest level, it will give China a greater say in the bullion market. Since China is the world’s largest producer and importer of gold it would like to have more influence on the gold price and the fix priced in yuan will help it to achieve this.

Published in Dawn, Business & Finance weekly, May 2nd, 2016