Stronger Dollar Weighs on Gold, Silver, Oil

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Commodities were weaker across the board on Wednesday, following sharp gains in the dollar after President Obama announced a $120 billion payroll "tax holiday" as part of extending the Bush-era tax cuts.

WTI Nymex crude is back below the $90/bbl mark today, having touched a 26-month high in yesterday’s session at almost $91/bbl. The OPEC extraordinary meeting in Ecuador this weekend is beginning to come into focus somewhat more, although expectations still suggest output quotas will not be changed. The U.S. Department of Energy released its monthly Short Term Energy Outlook yesterday, revising higher its forecast for 2010 and 2011 global oil demand, up 2.02 million barrels (mbls) and 1.43mbls, respectively, year on year.

The American Petroleum Institute (API) released its weekly oil inventory numbers after the bell yesterday, which showed a large 7.3mbls decline in crude stocks -- much more bullish than expected. As always, however, traders await the more extensive Energy Information Administration (EIA) numbers due today at 10:30 a.m. EST. The API data suggested the draw in crude came in large part thanks to a 4.2% increase in refinery utilization, which climbed to 86.1% in the week and more than offset the 1.9mbls increase in crude stocks. The outlook for products was somewhat less optimistic, however, with gasoline stocks increasing 4.8mbls and middle distillates climbing 1.7mbls.

The data has caused some shift in analyst estimates for today’s EIA numbers, with general consensus now suggesting crude stocks will fall between 2 and 3mbls, refinery run rates will increase by around 2% to 84%, gasoline stocks will climb slightly by around 1mbls, and middle distillates will see a smaller increase in the 0.5mbls region.

Precious metals have suffered under pressure from the strong dollar today, with spot gold pulling back from yesterday’s record high of $1,431/oz, now down below the psychologically significant $1,400/oz level. Early weakness in silver has now been offset, however, with the white metal making fairly good gains as investors move cash away from gold and into its less precious counterpart. It still remains far below the $30/oz point, which marked a 30-year high yesterday. Currently nearer to $29/oz., base metals have followed suit as the dollar gains triggered a bout of profit taking, with copper now around $8,800/tn, having topped a record high yesterday of $9,044/tn.

The base complex sees further weakness on speculation that China may implement fiscal tightening measures to cool the local economy, after Chinese media reported yesterday that 600 billion yuan of loans were granted in the country in November -- meaning the government’s annual target of 7.5 trillion yuan has already been exceeded. This also comes as the National Bureau for Statistics brings forward its publication of November economic data to Saturday.

Taiwan's largest steelmaker, China Steel Corporation (OTC:CISXF) today announced it has agreed to a price of $225/tn for premium hard-coking coal with supplier BHP Billiton Mitsubishi Alliance (BMA) for the first quarter of 2011. The move mirrors one between BMA and a large Japanese steelmaker early last month, and traditionally has been followed by similar deals by the other Asian producers. The price is an 8% increase on the current $209/tn of Q4 2010, although is still under the current spot rate.