commodities shiver after us credit downgrade · 12th record in 20 sessions. u.s. gold futures for...

An investor reacts in front of an electronic board showing stock information at a brokerage house in Huaibei, Anhui province May 12, 2011. REUTERS/China Daily

COMMODITIES SHIVER AFTER U.S. CREDIT DOWNGRADE

SPECIAL PDF REPORT AUGUST 2011

Oil, metals swoon, gold soars as fear grips markets Gold hits record for second day as investors dump stocks Gold hits peak, oil slumps on debt, growth fears Goldman and Merrill stay bullish on oil U.S downgrade to hit prices, panic unlikely Chile Escondida workers end 2-week strike

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Oil, metals swoon, gold soars as fear grips markets

By Manolo Serapio Jr

SINGAPORE, Aug 9 (Reuters)

I ndustrial raw materials plunged on Tuesday, with oil down more than 4 percent and copper hitting an eight-month low, as fears of a global recession fueled another sell-off in risk assets and lifted gold to a fresh record. Investors are counting on China's economic strength to support commodity prices when the Western world is on shaky ground. But data on Tuesday showing China's inflation speeding to a higher-than-forecast 6.5 percent in July suggests Beijing may have limited room to

stimulate domestic growth.

"It's crucial for commodity markets that China doesn't slide. Fears of a China slowdown would really take the wind out of the markets," said Citigroup analyst David Thurtell. The historic downgrade of the United States' credit rating on Friday, along with a raging debt crisis in Europe, triggered a sell-off that has knocked more than 10 percent off the price of U.S. crude in just two days and sent other commodities tumbling.

"It's panic at the moment," said Thurtell. "Obviously the risks of a recession have risen but I think that if the authorities act in a timely manner there'll be no need to panic." Asian stocks nose-dived, with major indexes across the region falling between 4 and 9 percent, after Wall Street dropped more than 6 percent in the first trading session after Standard & Poor's cut the United States' AAA debt rating.

Investors have lost confidence that Europe and the United States can effectively address their budget deficits and fear spread of another recession after the 2008 global financial meltdown.

GOLD SHINES

Highlighting the mounting uncertainty, safe-haven spot gold jumped 2.7 percent to an all-time peak of $1,761.09 an ounce, its 12th record in 20 sessions. U.S. gold futures for December also struck a record at above $1,764.

As investors exited stocks for bonds and bullion, holdings of the SPDR Gold Trust registered their biggest one-day gain in more than a year on Monday, sending the price of gold to a premium over traditionally more expensive platinum.

"Gold is now more expensive than platinum, and the last time this happened was back in December 2008. That's an interest-ing dynamic," said Natalie Robertson, commodities strategist at Australia and New Zealand Bank. Brent crude plunged to a six-month trough below $99 a barrel and U.S. crude fell as much as $5.60 to $75.71, its lowest since September 2010.

London copper fell more than 3 percent to a session-low of $8,446.25, its weakest since December. The losses spread to Shanghai futures where copper , aluminium and zinc all hit their downside limits. Rubber futures in Shanghai and Tokyo fell more than 6 percent.

COMMODITIES SHIVER AFTER U.S. CREDIT DOWNGRADE AUGUST 2011

A vendor pours a bottle of gasoline into a plastic container before selling it to motorists on the street in Indonesia's South Sulawesi province on February 22, 2011. REUTERS/Yusuf Ahmad

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Gold hits record for second day as investors dump stocks By Lewa Pardomuan


B ullion gained 1.7 percent on Tuesday, roaring to all-time highs for a second consecutive session as equity markets dived on growing fears of a global recession after last week's cut in the United States's credit rating.

Stock markets in Asia plummeted and the Swiss franc held near a record high after investors fled riskier assets in a global sell-off ignited by fears that political leaders are unable to tackle debt crises in Europe and the United States.

As investors exited stocks for bonds and bullion, holdings of the SPDR Gold Trust registered their biggest one-day gain in more than a year on Monday, sending the price of gold to a premium over traditionally more expensive platinum.

U.S. gold futures for December struck a record around $1,746 an ounce, while cash gold hit an all-time high about $1,742 an ounce, its 12th record in 20 sessions.

"Markets are now worried about another global recession. Out of Europe, French bond yields have widened on expectation of sovereign debt downgrade because of the country's exposure to peripheral European debt," said Natalie Robertson, a com-modities strategist at ANZ.

"I think everyone was also looking at the 7 percent drop in the S&P 500. The market was very concerned over the global econ-omy. Gold is now more expensive than platinum, and the last time this happened was back in December 2008. That's an in-teresting dynamic."

Gold rallied more than 3 percent on Monday, exceeding $1,700 an ounce for the first time after Standard & Poor's cut the U.S. credit rating to AA-plus, setting off an investor stampede for safety.

The cost of insuring French debt against default rose on Monday after the downgrade raised questions over how long other countries could hold onto their top-notch ratings.

Inflation adjusted gold price: ( http://r.reuters.com/pun62s )

Euro zone crisis graphics: ( http://r.reuters.com/hyb65p )

Silver ticked down below $40 an ounce after Monday's gains. Platinum and sister metal palladium tracked equities lower because of their industrial use as auto catalysts and fears a global recession could slash automobile demand.

COMMODITIES BATTERED BY SHARPEST LOSS SINCE MAY AUGUST 2011

A woman checks a gold waist belt inside a jewellery shop on the occasion of the Akshaya Tritiya festival in the southern Indian city of Hyderabad May 6, 2011. REUTERS/Krishnendu Halder


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Adjusted for inflation, gold is one of the few elements of the commodity complex trading below its all-time highs, estimated at $2,500 an ounce.

The CBOE Gold ETF Volatility Index, often referred to as the "Gold VIX" and based on SPDR Gold Trust options, jumped 30 percent to its highest since late 2010.

Investors await the Federal Open Market Committee meeting on Tuesday for clues to whether the Fed might ease monetary policy further.

"The market's near-term focus will be on further ratings downgrades to come," said Tom Pawlicki, precious metals and energy analyst at MF Global.

"The FOMC meeting is today, and any potential action to implement further easing will also offer support. In the background, support will come from central bank buying, investment inflows, and weakness in economic data."

Economists at top financial institutions have scaled back expectations for U.S. economic growth this year and offer a nearly one in three chance the Fed will embark on another round of Treasuries purchases in the next two years, a Reuters poll found.

JP Morgan said on Monday it expected spot gold to climb to $2,500 an ounce or higher by year-end, on very high volatility, following the downgrade of U.S. debt. The U.S. bank said its previous estimate of $1,800 was "too conservative".

The prospect of an even longer period of low U.S. interest rates prompted Goldman Sachs to raise its three-month forecast for the gold price by about $100. Precious metals prices 0157 GMT

TOCOM prices in yen per gram. Spot prices in $ per ounce.

COMEX gold and silver contracts show the most active months

Gold hits peak, oil slumps on debt, growth fears By Marcy Nicholson and Eric Onstad

NEW YORK/LONDON, Aug 8 (Reuters)

G old soared anew to an all-time high on Monday while riskier assets including oil, grains and copper dived, as inves-tors feared the U.S. loss of its prized AAA credit rating could stall economic growth.

Gold surged over 3 percent, rallying along with U.S. Treasuries as the European Central Bank's bond-buying pro-gram failed to ease mounting fears of a second recession. After a run of mostly bad economic data, that worry was

heightened late Friday by agency Standard & Poor's U.S. ratings cut.

U.S crude slid to an 8-1/2 month low in its biggest percentage tumble since May 5, extending losses late in the session as Wall Street crumbled, with the S&P 500 unofficially closing down 6.7 percent in its biggest drop in nearly three years.

Industrial metals and agricultural commodities fell at least 2 percent in a global risk-market rout that resembled the near panic selling of the 2008 financial crisis.

"You're going to see a very high correlation with risk assets because there's still a perception that commodities are cyclical and the only area that will perform differently is the gold space," said Pau Morilla-Giner, head of commodities and senior portfolio manager at London & Capital.

The Reuters-Jefferies CRB index tumbled 2.8 percent to its lowest level in nearly eight months and its biggest daily percent-age loss since May 11. The 19-commodity index has posted its biggest four-day drop in three months as investors worried about a stalling global economic recovery.

COMMODITIES BATTERED BY SHARPEST LOSS SINCE MAY AUGUST 2011 COMMODITIES SHIVER AFTER U.S. CREDIT DOWNGRADE AUGUST 2011

METAL LAST CHANGE Pct chg YTD pct chg VOLUME

Spot Gold 1739.59 24.09 1.4 22.55

Spot Silver 38.82 ‐0.15 ‐0.38 25.79

Spot Platinum 1707.99 ‐3.91 ‐0.23 ‐3.37

Spot Palladium 711.47 ‐3.28 ‐0.46 ‐11.01

TOCOM Gold 4328 40 0.93 16.06 68418

TOCOM Platinum 4281 ‐54 ‐1.25 ‐8.84 10474

TOCOM Silver 96.2 ‐3.5 ‐3.51 18.77 605

TOCOM Palladium 1765 ‐62 ‐3.39 ‐15.83 689

COMEX GOLD DEC1 1631.2 15 0.93 14.76 136930

COMEX SILVER SEP1 40.11 0.31 0.78 29.63 44407

Euro/Dollar 1.4185

Dollar/Yen 77.3

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The European Central Bank's move to intervene in Spanish and Italian bond markets and a pledge by G20 members to act to ensure market stability only briefly managed to temper losses in commodities.

While most commodities sagged, gold's 15 percent rally since June showed few signs of flagging, as investors bet more stimu-lus would be needed to put the economy back on track.

"Investors are looking upon the ECB bond-buying as the first step towards the same kind of quantitative easing program the Fed is doing." said James Rife, an assistant portfolio manager at Haber Trilix Advisors, which manages $2 billion in assets.

"So, gold acts as the only currency that you can't print more of, and you are seeing a huge institutional demand for it."

Spot gold climbed to an all-time high of nearly $1,720 an ounce, its 11th record in 19 sessions, as investors snapped up the precious metal. It was up 3.1 percent at $1,714.09 an ounce at 3:51 p.m. EDT (1951 GMT). U.S. gold futures for December deliv-ery settled up $61.40 at $1,713.20 an ounce with trading volume near 300,000 lots, one of the busiest sessions this year.

Investors have bought more gold in the last month than in the prior six months, based on the increase in open interest on the COMEX market from speculators and money managers, as well as inflows into exchange-traded products.

Analysts scrambled to raise their targets on bullion. Dominic Schnider, executive director for wealth management research at UBS, said gold may even be headed to $2,000 per ounce, while JP Morgan strategists pointed to $2,500.

CFTC commodity trader positions: ( http://r.reuters.com/buv87r )

Commodities with supply issues such as copper and corn were still attractive in the longer term, London & Capital's Morilla-Giner said, and investment bank Goldman Sachs maintained its overweight recommendations on commodities relative to other assets.

RECESSION FEARS HIT OIL

Oil slumped on worries that a sluggish global economy will sap energy demand. "Chances of a double-dip recession have in-creased over the last week," said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. "I still don't think another recession is a probability, but economic growth forecasts are being lowered."

U.S. crude oil futures closed down $5.57 at $81.31 a barrel -- the lowest close in 8-1/2 months and its sixth loss in seven ses-sions -- then slid as low as $80.07 post settlement. Brent crude shed 5.2 percent to finish at $103.74 a barrel.

U.S. oil is down around 7 percent this year compared with a rise of 15 percent last year, while Brent has gained 13 percent against an increase of 22 percent last year. Fears about a global slowdown also hit industrial metals. Copper on the London Metal Exchange, a metal used in power and construction, fell to a 12-week low of $8,750 a tonne and closed at $8,770.

"With many markets pricing more fear than fundamentals at the moment, buyers may still be a bit cautious," analyst Duncan Hobbs of Macquarie said. Tin slumped as much as 8 percent to $22,400 a tonne, its weakest since last September.

In agricultural markets, U.S. and European grain futures fell sharply after holding up relatively well during investor sell-offs last week, supported by concerns over the U.S. corn crop after hot weather last month. "It is more of a macro story today, it is continued flight to safety and that suggests outflow of capital from agricultural commodities,"" said Brett Cooper, a senior markets manager at FCStone Australia. Losses were tempered ahead of a government report later this week that will shed light on U.S. corn and soybean crops after heat stress last month. Prices at 4:59 p.m. EDT (2059 GMT)


LAST/CLOSE NET CHG PCT CHG YTD CHG

US crude 80.8 ‐6.08 ‐7.00% ‐11.60%

Brent crude 104 ‐5.37 ‐4.90% 9.80%

Natural gas 3.935 ‐0.006 ‐0.20% ‐10.70%

Gold 1717.84 55.59 3.30% 21.00%

US Copper 396.15 ‐15.55 ‐3.80% ‐10.90%

LME Copper 8781 ‐260 ‐2.90% ‐8.50%

Dollar 74.853 0.255 0.30% ‐5.30%

CRB 317.74 ‐9.06 ‐2.80% ‐4.50%

US corn 675.25 ‐17.75 ‐2.60% 7.40%

US soybeans 1309.25 ‐22.25 ‐1.70% ‐6.10%

US wheat 656.5 ‐22.5 ‐3.30% ‐17.30%

US Coffee 234.2 ‐3.8 ‐1.60% ‐2.60%

US Cocoa 2909 ‐27 ‐0.90% ‐4.20%

US Sugar 26.98 ‐0.56 ‐2.00% ‐16.00%

US silver 39.38 1.169 3.10% 27.30%

US platinum 1723.6 4.5 0.30% ‐3.10%

US palladium 728.5 ‐13.25 ‐1.80% ‐9.30%

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Goldman and Merrill stay bullish on oil LONDON, Aug 8 (Reuters)

O il prices will rise again soon even if they fall further in the short-term because governments have no other tools to combat slow growth other than further ease monetary policies, leading commodities trading banks said on Monday.

"For many governments, monetary policy could be the only tool for expansion. Given the broad supply constraints in this (oil) sector, an extensive monetary response would create a rather positive backdrop for commodities," Bank of

America Merrill Lynch said in a research note.

Another major commodities bank, Goldman Sachs, said it was still positive on several commodities including Brent oil, copper, zinc, UK natural gas and soybeans.

"Several factors are leading us to keep our constructive commodity views over the next year intact, including still-high expec-tations of global GDP growth sufficient to tighten key commodity markets, expected strong growth in emerging markets - es-pecially given the ability to reverse or ease tightening policy to buoy growth - and commodity supply disappointments," Gold-man said in a note. Goldman and Merrill are among the biggest commodities traders among the investment banks. As swap dealers they provide hedging services to industrial commodity consumers and producing companies.

Chinese and Indian officials have been tightening monetary policies in the past year to combat inflation but slower growth rates have suggested those policies could be reversed.

A possible third round of a U.S. bond-buying programme, known as quantitative easing, is also being discussed as a key factor for commodities markets, which were hugely boosted by the second round last year.

Goldman and Merrill have been often delivering polar views on oil markets this year. Goldman correctly forecast a slump in oil in May when Merrill was predicting a ride to new highs. After the May price falls, Merrill predicted another sharp correction in oil in the second half of 2011 whereas its peers said they expected prices to rally.

Commodity prices then and now: ( http://link.reuters.com/vam88r )

On Monday, Merrill said a slump in oil could be very pronounced in the short-term. It said that in a recessionary environment oil demand could contract by 400,000 barrels per day in 2012 versus its current baseline projection of positive demand growth of 1.5 million bpd.

But a drop in demand could trigger a cut in production as OPEC leader Saudi Arabia needs a price of oil of at least $85 per barrel next year and producers in Canada need prices of above $70 to avoid shutting down facilities, Merrill said.

"In a mild recession, we would expect to see Brent crude oil prices briefly breaking below $80 per barrel, only to gain back that level as OPEC turns the taps off," Merrill said. U.S. crude could briefly drop to $50 under a recession scenario.


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Goldman said it maintained its $130 a barrel Brent crude oil price forecast for 2012, despite a roughly 1 in 3 risk of a slide back into economic recession in the United States. "Despite revisions to our U.S. economic outlook, we continue to see fundamen-tals supporting an upward trajectory to oil prices in 2012," analysts David Greely and Stefan Weiler wrote in a note to clients.

Goldman said it was only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply.

"Consequently, we believe the recent market correction provides a good opportunity for consumers to begin to hedge their forward oil exposure," said Goldman.

It recommended a long position in the ICE Brent December 2012 contract, saying it expect that the market will continue to tighten to critical levels by 2012.

U.S downgrade to hit prices, panic unlikely By Manolo Serapio Jr and Dmitry Zhdannikov

SINGAPORE Aug 7 (Reuters) -

C ommodities, except gold, will likely fall when markets open on Monday due to a U.S. ratings downgrade and a wors-ening debt crisis in Europe but panic shall be avoided.

Bullion should benefit from renewed risk-aversion while outlook for demand for oil, base metals and grains deterio-rates.

Strong economic growth in China -- the world's top copper consumer, No. 2 oil user and major buyer of grains -- as well as tight global supplies for some raw materials including coal and iron ore, will provide certain support and some investors may see weakness as a buying opportunity.

"It should be an orderly decline, nothing to panic about. The important thing now is that confidence doesn't slip too far," said Citigroup analyst David Thurtell.

Standard & Poor's cut the long-term U.S. credit rating to AA-plus on Friday, a move that over time could ripple through mar-kets by pushing up borrowing costs and making it more difficult to secure a lasting recovery.

The cut in ratings for the world's largest economy and a spreading crisis in Europe prompted global policymakers to hold an emergency conference call on Sunday to discuss the debt crises in the United States and Europe.

"I would expect price action to be choppy and volatile and downward pressure on prices are likely to remain until a more cer-tain trajectory to economic growth is ascertained," said Amrita Sen from Barclays

Euro zone crisis graphics: ( http:/r.reuters.com/hyb65p )

Commodity prices then and now: ( http://link.reuters.com/vam88r )

Global agricultural prices then and now: ( http://link.reuters.com/dab94r )

The U.S. dollar may weaken and Treasury yields rise on Monday after S&P's move, though any selling is likely to be tempered by the escalating crisis in the euro zone.

Olivier Jakob from Petromatrix said a potential steep fall in eq-uities could drag commodities down as some hedge funds will be facing margin calls.

"However if the US dollar debases further that could have a short term positive impact on oil due to the computerised trad-ing on the dollar fluctuation. But given that the rest of the world (China, Europe) are facing their own financial problems we do not think that any support from a weaker dollar will have a long and lasting impact on the oil prices".

The Reuters-Jefferies CRB index, the 19-commodity benchmark, fell nearly 4.5 percent last week, its steepest drop since a rout in early May fuelled by concerns about a stalling global economic recovery.

London copper should lead base metals lower and grains may also retreat, while gold could retest new peaks. Gold hit an all-time high of $1,681.67 an ounce on Thursday, its 10th record in 18 sessions. "The initial reaction will be a high degree of uncer-tainty and thus volatility since investors will not know where to turn for safety," said Mark Mobius, executive chairman of Templeton Emerging Markets group which oversees $50 billion in emerging market assets.


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"During the sub-prime crisis safety was in U.S. dollars and U.S. Treasuries. Now that anchor to the global community is dete-riorating," he said in an email to Reuters.

However, with China's economy, the world's second largest, continuing to expand strongly, "commodities could be a bit of a haven on a China play," said Citigroup's Thurtell.

"China has not excessively borrowed, they've got a pretty good fiscal position, they've got very high foreign exchange reserves, so China's got the ability to keep growing and that's the bottom line in commodity markets," he said.

Chile Escondida workers end 2-week strike By Moises Avila

ANTOFAGASTA, Chile, Aug 5 (Reuters)

W eary workers at Chile's giant Escondida mine caved on Friday and signed a bonus deal ending a two-week strike that shut down the world's top copper deposit and stoked global supply fears.

Union leader Marcelo Tapia said workers would gradually resume operations early on Saturday after lifting a stoppage at the mine that extracts 7 percent of the world's copper. The union said on its website workers would

start heading up to the mine at 9 p.m. on Friday (0100 GMT Saturday).

Escondida's mine operator said in a statement it had "started the process of progressively resuming operations."

A spokesman for BHP Billiton in London confirmed the deal had been signed. He declined to comment on output losses due to the strike, which is believed to have cost BHP more than 40,000 tonnes of copper production.

The end to the strike, which surprised markets by stretching on for two weeks, will likely ease supply fears and add to a sharp fall in copper prices as a gloomy global economic outlook sparks a flight to save-haven assets.

Copper rose to near four-month highs earlier this week, thanks in part to the stoppage, but has shed more than $500 in value as investors fret over the global economy. "The stoppage is over," Tapia told Reuters. "Operations will start up again tomorrow morning."

Union sources said workers ultimately gave in to the company's hardball tactics and accepted an unimproved offer they had already rejected once because they were tired and their families were pressuring them to return to work. "This (the end to the strike) might remove some of that (price) support, but I think what's going to be far more influential to prices is what happens on the macro front over the next few days," said Gayle Berry, an analyst with Barclays Capital in London.

Copper hit a five-week low on Friday in London as risk aversion resurfaced and mounting concerns about global economic health caused investors to shed exposure to risky assets. Copper fell to $9,114.75 per tonne.


Ahmed Ali, a 42-year-old artisan, paints a copper wall partition at a handicraft workshop in Karachi July 12, 2011. REUTERS/Athar Hussain


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The world's top miner had defied strikers, resubmitting a lower bonus offer that aimed to set an example to workers at other mines mulling similar pressure tactics to demand more from the copper-price bonanza.

Union officials said the proposed bonus worth $5,760 fell short of workers' expectations but acknowledged strikers were tired after two weeks on the picket lines without pay. However they said 65.5 percent of workers voted to accept the bonus.

The stoppage lasted longer than expected and forced the mine to declare force majeure -- a contract clause that frees it of liability on delivery delays -- on copper concentrate sales.

It also became a headache for unpopular President Sebastian Pinera, who is struggling with massive student demonstrations that turned violent on Thursday after clashes with police in the capital Santiago.

Graphic on Chile mines: ( http://r.reuters.com/gyz52s )

MORE TURBULENCE AHEAD

Soaring commodity prices have moved workers from Zambia to South Africa and Australia to demand a bigger share of the near-record profits of mining giants such as Anglo American and Freeport McMoran .

Unions at Escondida tapped into the growing discontent against Pinera, which may force him to ease on the strict fiscal disci-pline that has made Chile the region's most stable economy.

The strike came only days after workers at state copper giant Codelco downed tools for 24 hours to protest against massive layoff plans as part of a restructuring of the world's top copper producer.

The Escondida strike caught Chile off guard, coming outside the collective bargaining process. It has raised the possibility of increasingly unpredictable and volatile labor action in Chile, the world's top copper producer.

The world's No. 3 copper mine, Collahuasi, went through a 24-hour partial strike over the weekend. Some workers at Colla-huasi, which accounts for 3.3 percent of global mined copper, downed tools on Saturday over labor demands of their own but ended their protest on Sunday.

Diego Hernandez, Codelco's CEO, told Reuters in Australia on Thursday he saw some risk that unrest at Escondida could spread to other mines in Chile, but said companies would be able to manage.

The last time Escondida workers downed tools in 2006 -- for 25 days -- they had similar demands for higher bonuses linked to lofty profits. Copper prices then rallied on the stoppage. Labor unrest and severe weather disruptions have buffeted the min-ing industry in Chile this year, which may cut its annual output target and deepen a global supply deficit.

Codelco's Hernandez said a string of strikes, bad weather and delayed start ups would probably drag down Chile's estimated annual output by 5 percent or by up to 500,000 tonnes in 2011.


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Mexico seen starting 2012 oil hedge as prices plunge By Luis Rojas and Jeffrey Kerr

MEXICO CITY/NEW YORK, Aug 4 (Reuters)

M exico has begun testing the market for hedging next year's oil revenues, a government official said on Thursday as a massive options trade in New York fuelled speculation that its annual program has started.

In the midst of one of the biggest oil price routs of the past two years, a 5 million barrel three-way options and futures combo trade prompted talk that Mexico has begun moving this week to lock in 2012 prices. Mexico's an-

nual budget depends heavily on oil revenues, prompting the country to hedge much of its 1.4 million barrels a day in exports.

U.S. benchmark oil prices slid by $5.30 a barrel to settle at $86.63, the biggest one-day drop since May 5. The combination of falling prices and relatively low implied volatility -- a measure of the cost of buying options protection -- had stirred talk in the past few days that the world's sixth-largest oil producer was set to act.

"We are evaluating conditions in the market," Deputy Finance Minister Gerardo Rodriguez told reporters in Mexico City, with-out providing more details. Mexico's Finance Ministry, which handles the world's largest sovereign oil hedging program, was not immediately available for comment on the specific trade. Last year, Mexico paid about $800 million to hedge 222 million barrels of its 2011 oil output with options.

It is one of the few countries that uses derivatives to protect its oil revenues, and its appearance in the market often creates shockwaves because of its size. Reuters was not able to confirm the hedging with players involved in it directly. But several market sources said they believed the atypically large deal was almost certainly Mexico.

VOLATILITY SURGES

The Chicago Board Options Exchange's Oil Volatility Index soared more than 25 percent to 42.94 percent, driven up by swiftly tumbling crude prices. Thursday's trade marked the widest trading range for the index since May 5, when crude prices abruptly fell more than $10.

The index rallied during the session as U.S. crude broke below key technical support levels from June, turning negative for the year as a string of dire U.S. economic indicators undercut oil demand growth expectations in the top consumer.

But at midday the market's focus turned to the New York Mercantile Exchange (NYMEX) floor, where floor brokers witnessed a complex structure -- known as a "three-way lay-up" -- that consisted of December 2012 $100/$140 call spreads, December 2012 $80 puts and September 2011 $88.50 futures.


A worker fills diesel in containers at a fuel station during a rain shower at Noida in the northern Indian state of Uttar Pradesh May 21, 2011. Last June, the Indian govern-ment allowed state-run oil firms to fix the price of petrol but continued to control the prices of diesel, kerosene and cooking gas to protect the poor and try to tame infla-tion. The government is widely expected to raise diesel prices soon. REUTERS/Parivartan Sharma


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"There was one big, baffling trade today," said GA Global Markets broker Tony Rosado. The buyer bought the $80 puts and then financed them by selling the call spread, which consisted of selling the $100 call and buying the $140 call. Then the buyer bought the futures contract, market sources said. This structure was done 5,000 times -- an unusually large volume for options contracts that rarely trade more than a few hundred lots in a single day -- shortly before 1:00 p.m. EDT (1700 GMT) as the crude oil market was plunging. Brokers and traders alike said a large bank or a couple of banks had brought the trade to the floor and that it was consistent with a producer looking to lock in prices.

Rio warns of commodity price volatility LONDON, Aug 4 (Reuters)

G lobal miner Rio Tinto warned on Thursday of high levels of volatility in commodity markets, pointing to risks to robust prices from monetary tightening in the developing world and European sovereign debt crises.

The warning, in a report published alongside its first-half results, comes as worries over the strength of global de-mand battered base metals prices and equity markets.

The UK mining sector was down 4.3 percent at 1320 GMT, hitting its lowest levels since September last year, and copper hit its lowest price in almost a month. Rio, which forecasts Chinese GDP growth of 9.5 percent this year, said strong demand for met-als, combined with supply constraints, suggested high prices for the rest of 2011 and into 2012. But it highlighted two key risks -- the pace of credit tightening and the potential for European and U.S. debt troubles to destabilise the broader global econ-omy.

"Given this range of risks, it seems likely that news or rumours affecting expectations about monetary, credit and fiscal settings as well as the broader health of the financial sector will induce ongoing volatility in commodity markets, albeit around an ele-vated price trend," Rio Chief Economist Vivek Tulpule wrote.

Tulpule said he expected increasing prosperity in China, India and other developing economies to drive demand growth and pointed to economic imbalances being resolved, including high debt levels in developed countries and a reduced dependence on exports in China. "We expect that real long-run prices and margins for almost all minerals and metals will average signifi-cantly higher going forward than in the decade preceding the most recent six-year boom, but price volatility is also expected to be elevated -- a pattern we have dubbed as the 'saw tooth economy'," he said.

SINGAPORE INTERNATIONAL ENERGY WEEK—SPECIAL PDF NOVEMBER 2010 GOLD HITS RECORD HIGH ABOVE $1,622/OZ JULY 2011 GOLD HITS RECORD HIGH ABOVE $1,622/OZ JULY 2011 COMMODITIES BATTERED BY SHARPEST LOSS SINCE MAY AUGUST 2011

A man passes a screen showing the activity of the FTSE index at Canary Wharf financial district in London August 5, 2011. Banks and commodity stocks fell sharply on Friday as Britain's top share index extended losses into a sixth straight trading day, roiled by a global debt crisis and unmoved by U.S. jobs data easing fears of another economic recession. London's blue chip index closed down 146.15 points, or 2.7 percent at 5,246.99, as investors continued to pile funds into safer havens such as bonds, gold and the Swiss franc. REUTERS/Luke MacGregor


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BREAKINGVIEWS-Plunging markets reflect ugly political paralysis The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Agnes T. Crane

NEW YORK, Aug 4 (Reuters Breakingviews)

T hursday's market plunge reflects, as much as anything, an ugly political paralysis. This phenomenon, rather than any particular headline, seems to have freaked out investors, sending U.S. stocks down around 5 percent, Treasury yields below 2.5 percent, oil under $90 a barrel and even gold off 0.5 percent. Politicians' brinksmanship in Europe and the United States makes for great theater, but it has done little to resolve what most troubles the global economy: too

much debt and no clear plan to pay it off.

Take Uncle Sam. Some lawmakers seemed willing to risk a self-inflicted catastrophic default. Yet the last minute agreement did nothing to address the long-term healthcare and Social Security burden -- by far the biggest danger to the nation's fi-nances longer-term.

The $2.4 trillion in hoped-for but nebulous spending cuts falls short of the $4 trillion needed to stabilize the U.S. debt-to-GDP ratio. And the deal ensures that the clearly slowing pace of economic growth can't be tackled with fiscal stimulus.

Europe, meanwhile, still looks lost in the weeds of its much more real and immediate debt crisis. The region has been trying to set things right for nearly two years since Greece's oversized debt load first appeared in the market's crosshairs.

A series of EU-wide rescue packages may have been political achievements of sorts, but their failure to address the problem fully has left peripheral nations vulnerable to bond market sharks, with Italy the latest to feel their bite. Calls for a bigger Euro-pean rescue fund and the European Central Bank's decision to intervene in markets again show the political classes flounder-ing.

Predictably, many investors are holding out hope that central banks will ride to the rescue, as they have for the last four years, with further monetary stimulus.

But it's no surprise their limited tools are no longer right for the job. Flooding the market with more cheap money surely can't be the right fix when the Bank of New York , for one, is now charging big depositors a fee to park cash in its vaults.

What's needed is a genuine effort to reduce debt, not just delay repayment one more time, as with the latest Greek bailout. Un-fortunately that means making unpalatable choices, like opting for austerity and even tax hikes, at least temporarily. While the West's leaders instead flail and fudge the numbers, it's no wonder if investors lose faith.

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Commods lost $16 bln in value during Thursday rout By Lisa Shumaker

CHICAGO, Aug 5 (Reuters)

C ommodity markets lost more than $16 billion in value during Thursday's sell-off, although open interest rose slightly, an analysis of exchange data showed.

Equity and commodity markets plunged as growing anxiety over the global economic outlook spurred a flight to safe-haven bonds.

Open interest across the 19 commodities that make up the Reuters-Jefferies CRB index, a global commodities benchmark, rose 0.5 percent but the drop in prices wiped out $16 billion in value, mainly due to oil prices dropping 6 percent and investors losing $7.3 billion on paper.

Spreadsheet of commodity OI: ( http://r.reuters.com/maw92s )

The $16 billion drop in value far exceeds losses seen in May when commodity markets crashed and oil suffered its worst sell-off on record -- a sell-off also triggered by worries about the global economy slipping back into recession.

Commodities on May 5 lost only $227 million in value as open interest in U.S. crude oil soared to a record at the time and added $2.3 billion of value despite the plunge in prices.

In Thursday's rout, energy markets once again led the increase in open interest. Open positions in natural gas rose 3.4 percent and by 2.8 percent in heating oil.

Open interest in a futures market tallies long and short contracts that are not offset.

On Friday, commodities trimmed early losses and oil ended up as buyers emerged in markets cheapened by this week's falls after positive euro zone news eased global economic worries.

SINGAPORE INTERNATIONAL ENERGY WEEK—SPECIAL PDF NOVEMBER 2010 GOLD HITS RECORD HIGH ABOVE $1,622/OZ JULY 2011 GOLD HITS RECORD HIGH ABOVE $1,622/OZ JULY 2011 COMMODITIES BATTERED BY SHARPEST LOSS SINCE MAY AUGUST 2011 COMMODITIES SHIVER AFTER U.S. CREDIT DOWNGRADE AUGUST 2011

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Asia shares nosedive; gold scales another peak


A sian stock markets plunged on Tuesday and the Swiss franc held near a record high as investors dumped riskier assets in a global rout triggered by fears that political leaders are failing to tackle debt crises in Europe and the United States.

Major indexes across the region fell between 4 and 9 percent, following drop of more than 6 percent on Wall Street on Monday in the first trading session since the historic downgrade of the United States' AAA credit rating by Standard & Poor's.

S&P futures fell more than 3 percent at one point on concerns the downgrade could further erode already weak business and consumer sentiment, potentially pushing the U.S. economy back into recession.

The panicked flight-to-safety lifted gold to the latest in a string of record highs, boosted the Swiss franc and the yen and lifted Japanese government bonds and, ironically, U.S. Treasuries -- the asset directly affected by the downgrade.

"We are looking at markets pricing for some sort of financial crisis. I think we are at a critical period now," said Warren Hogan, chief economist at ANZ Banking Corporation.

"The declines in the equity market globally are around 15 to 20 percent, that's still an order of magnitude regarded as a correc-tion. If we see another 5-10 percent decline in equities we are in slump territory indicative of some sort of financial seizure."

While the U.S. downgrade late on Friday was the most obvious blow to confidence, investors have also been spooked by data suggesting the U.S. economy was stalling and Europe's ever-worsening sovereign debt crisis.

There are also concerns about China's inflation rate, which analysts fear could curb Beijing's ability to stimulate demand to off-set a global slowdown.

Chinese data on Tuesday failed to offer respite, showing consumer price inflation hugging three-year highs in July.

"Now is not the time to talk about inflation. China must be on serious watch for policy overtightening under the current global circumstances," said Dong Xian'an, chief economist at Peking First Advisory.

Japan's Nikkei share average fell 4.4 percent and MSCI's broadest index of Asia Pacific shares outside Japan shed 6 percent.

Stocks were sold off across the board, with even defensive sectors in the MSCI Asia ex-Japan index such as telecoms and utili-ties dropping more than 4 percent.

Australia's benchmark tumbled 4.5 percent to take its decline from a recent April peak to more than 20 percent. Hong Kong's Hang Seng fell 7.3 percent and South Korea's KOSPI tumbled 8.4 percent.

A stock exchange official in Seoul said it may ban short selling of shares to stabilise markets.

"It's very emotive trading," said Simon Burge, chief investment officer at ATI Asset Management in Australia. "Fundamentals would have to deteriorate quite significantly to catch up with where share prices are."

Financial stocks have been amongst the hardest hit, with some investors fearing that in a worst case scenario the debt crises on both sides of the Atlantic could prompt a repeat of the money market seizure that followed the collapse of Lehman Brothers in 2008.

"Market players are seeking emergency refuge and fleeing to safe assets," said a customer trader at a major Japanese bank in Tokyo. "In the money market, where there is heightened demand for dollars, dollar lenders are running away."

The dollar fell to an all-time low near 0.7480 Swiss francs , while the euro plumbed around 1.0640 francs . They later traded around 0.7510 and 1.0650 francs respec-tively.

Against the yen, the dollar slipped to around 77.25 from above 80 yen just last week, while the euro slid to around 109.55 yen from re-cent highs around 114.00.

Gold , a traditional refuge from financial storms, hit a record above $1,742 an ounce.

JP Morgan said on Monday it expected spot gold to climb to $2,500 an ounce or higher by year-end, on very high volatility, following the downgrade of U.S. debt. The U.S. bank said its previous estimate of $1,800 was "too conservative". U.S. crude oil futures fell nearly $5, or around 6 percent, to trade around $76.50 a barrel, the lowest since Sep-tember 2010.


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Kuwait oil min says oil prices should rebound KUWAIT, Aug 7 (Reuters)

C rude oil prices should bounce back once global markets regain confidence after last week's startling downgrade of the United States' credit rating, the oil minister of OPEC-member Kuwait said on Sunday.

U.S. light crude dived to a low of $82.87 a barrel, its lowest level since November 2010, after the world's largest econ-omy lost its top-notch AAA credit rating from Standard & Poor's on Friday, before better-than-expected U.S. jobs

growth data drove a modest recovery to $86.88.

Increasing concern over the euro zone debt crisis also drove benchmark Brent crude oil down from highs of $120.40 a barrel last Monday to a low of $104.30 on Friday. "We hope that this drop (in oil markets) does not last for a long time and we start seeing international markets recovering gradually ... after the panic we have seen from the situation in the U.S. and Europe," Mohammad al-Busairi told Reuters in an interview on Sunday. Kuwait's crude output averaged 2.6-2.7 million barrels per day (mbpd) in July, peaking at 2.8 mbpd some days, Busairi said, adding that Kuwait's output in August would depend on demand.

Kuwait was the world's sixth largest oil exporter in 2010 and the government relies heavily on oil revenues.

In June, Kuwait's parliament approved a 19.4-billion dinar ($70.9 billion) budget for the 2011/12 fiscal year, the country's biggest since at least 2003, based on a conservative oil price estimate of $60 per barrel.

Oil price graphic: ( http://link.reuters.com/gyw92s )

Iran says OPEC will meet if prices keep falling-SHANA TEHRAN, Aug 5 (Reuters)

O il ministers from producer group OPEC will meet if prices continue to fall, Iran's OPEC governor, Mohammad Ali Khatibi, said on the Oil Ministry news website SHANA on Friday.

"If the downward oil price trend continues the ministers of OPEC will hold talks and negotiate," he said.

When asked if that meant an emergency OPEC meeting would be called, he answered: "It's still soon (to say) be-cause oil price fluctuation is the nature of the market."

Khatibi's comments appeared after reports of a pipeline explosion in Iran caused an rise in prices that have fallen on fears of weakening economic growth and oil demand.

Iran, a leading price hawk inside OPEC, holds the rotating presidency of the group. At the last OPEC meeting, on June 8, it suc-cessfully opposed a push led by Saudi Arabia to raise output quotas, leading the Saudis to increase production unilaterally.

Khatibi said the likelihood of a renewed global downturn might require a rethink.


15

"The reports on western powers' economic situation indicate there is a crisis in these countries," he said.

"The experience of previous years shows economic problems can have an impact on global demand for oil and we should ob-serve whether or not this crisis will continue in the coming weeks and then we can reach a comprehensive conclusion."

Brent crude oil was up 56 cents at $107.81 a barrel as of 1005 GMT, having earlier fallen to $104.30, the lowest since June 27, on concern demand will weaken as U.S. growth falters and Europe's debt crisis worsens. It fell almost $6 in the previous ses-sion.

Spot gold to rise to $1,715/oz SINGAPORE, Aug 8 (Reuters)

S pot gold would rise to $1,715 per ounce, as indicated by its wave pattern and a Fibonacci projection analysis.

The metal is riding on a upward wave (3), pro-gressing towards the 100 percent Fibonacci pro-jection level, based on the length of the wave (1)

rise from $1,478 to $1,609.51.

The wave three is generally the strongest and craziest move among the impulsive waves.

Retracement will be shallow, limited to $1,680.

SINGAPORE INTERNATIONAL ENERGY WEEK—SPECIAL PDF NOVEMBER 2010 GOLD HITS RECORD HIGH ABOVE $1,622/OZ JULY 2011 GOLD HITS RECORD HIGH ABOVE $1,622/OZ JULY 2011 COMMODITIES BATTERED BY SHARPEST LOSS SINCE MAY AUGUST 2011

A stock ticker reflects falling stock prices inside the London Stock Exchange August 5, 2011. Losses on Britain's leading share index steadied approaching midday on Friday as investors looked ahead to the release of the August U.S. jobs report in a market nursing a fall of 10 percent in the past week. REUTERS/Suzanne Plunkett


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SINGAPORE INTERNATIONAL ENERGY WEEK—SPECIAL PDF NOVEMBER 2010 GOLD HITS RECORD HIGH ABOVE $1,622/OZ JULY 2011 GOLD HITS RECORD HIGH ABOVE $1,622/OZ JULY 2011

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