Oil price gains curtailed by Saudi comments

Silver and palladium were the top performers in the precious metals space again yesterday, with increasing market optimism and rising inflation expectations resulting in another solid day for industrial metals. The gold price put in a decent showing, with the most actively traded Comex gold contract – for April delivery – settling up $11.50 (0.7%) to $1,667.30/oz. Silver for May delivery gained 35 cents (1.1%) to settle at $32.96/oz. Surprisingly considering that silver and palladium both outperformed gold, platinum was the laggard among the precious metals, with Comex April platinum up by just 0.6% to $1,684.70/oz.

However, precious metals and commodities have moved lower in trading this morning, following news that the Saudis are looking at ways of expanding crude oil production so as to return oil prices to “fair” levels. The world’s largest mining company, BHP Billiton, has also reported signs of “flattening” iron ore demand from China – more bearish news for commodities.

ZeroHedge produces a chart that should give good reason to doubt whether this Saudi news will lead to any serious decline in oil prices. As Tyler notes: “In the past two months, (Saudi) production has been at record highs, even as oil keeps setting new highs, entirely due to liquidity”. Lax monetary policy is the elephant in the room as far as recent gains in commodities are concerned, and will continue to be the case as long as central banks keep the monetary spigots open.

This morning’s decline in commodities is taking some of the pressure off the US Treasuries market, which sold off again yesterday. The yield on the 10-year US Treasury note reached 2.38% – close to the technically significant yield of 2.4%. If the yield breaks above 2.4%, we could be seeing the start of a longer-term sell off in US debt. This could be the cue for moves by the US government to force American banks to hold a far greater proportion of their assets in Treasuries.

Back across the pond, new inflation statistics for the United Kingdom show price pressures abating. The year-on-year CPI fell to 3.4% in February, down from 3.6% in January. RPI – which factors in mortgage interest payments – was down to 3.7% from 3.9% last month.

Given the sharp declines in broad UK money supply measures such as M4 during the autumn of last year – as a result of eurozone fears – a correction in the upward trajectory of prices isn’t that surprising. But analysts had expected the CPI to fall to 3.3% this month, and RPI to be at 3.6%. On top of this, broader money supply measures have again started increasing since the start of the year. We feel confident asserting once again that UK inflation will surprise to the upside in the months and years ahead, though given the lag in money supply growth resulting in increases in consumer prices, we may have to wait until the fourth quarter before we see prices creeping higher again on a month-by-month basis.