Near-term outlook for crude oil, gold bearish

By Pritam Kumar Patnaik


Oil prices continued to fall over concerns that producers are churning out more crude than the world needs amid a bleak economic outlook.

The commodity had started on an upbeat note earlier last week after the Organisation of the Petroleum Exporting Countries (Opec) was pushing allied producers including Russia to join in output cuts of 1 million to 1.4 million barrels per day (mbpd).

However, after an upbeat start to the week, oil tumbled to over 1-year lows, as investors remained on the edge, with the International Energy Agency (IEA) warning of unprecedented uncertainty in oil market due to a difficult economic environment and political risk.

Oil prices were also caught in a broader Wall Street selloff fed by mounting concerns about a slowdown in global economic growth.

Macro-focused funds and commodity trading advisory (CTA) firms have pulled back positions in recent weeks as the selloff accelerated. Hedge funds and other money managers cut its combined futures and options position in New York and London during the period by 8,259 contracts to 1,65,121, the lowest since June 2017.

Fast-growing output from producers over which Opec has no influence, such as the US, threatens to tilt the market into surplus for the whole of 2019, according to estimates from the International Energy Agency.

On the supply side, US crude stocks rose 4.9 million barrels last week, the Energy Information Administration (EIA) said, a larger-than-expected increase. US crude oil production remained at a record 11.7 million barrels per day (bpd), the EIA said.

Domestic crude tracked overseas prices and corrected sharply. A stronger rupee also weighed on the prices. The domestic currency appreciated by 1.74 per cent supported by the fall in overseas oil prices.

In other news, Petroleum Planning and Analysis Cell (PPAC) of the oil ministry of India showed that India’s crude oil imports in October rose to their highest level in at least more than seven years. Crude imports in October climbed 10.5 per cent from a year earlier to 21.02 million MT.

Looking ahead, the next biggest trigger point for oil prices will be the December Opec meeting.

According to a Reuters report, oil supply has surged this year, with top-three producers — the US, Russia and Saudi Arabia — pumping out more than a third of global consumption, which stands around 100 million barrels per day (bpd).

Fearing this glut, the Middle East dominated producer cartel of Opec is considering supply cuts, although some members such as Iran are expected to resist any voluntary reductions. While there is talk that Opec+ Russia may again agree to a production cut, the concern is that not all relevant parties will be able to come to an agreement.

Technically, December crude futures continued to tumble and moved lower from Rs 4,153 to Rs 3,610 levels. This was the seventh consecutive week where prices moved lower and formed bearish candlestick pattern.

On a weekly basis it has lost around 14 per cent. This has brought prices below the channel support, which was intact since 2016 and hence one should be alert now.

On daily chart prices have been trading below 10, 20 and 50 days of EMA, which suggests near-term trend will remain bearish, but looking at the oversold level of RSI and MACD some consolidation is possible. As of now Rs 3,550 is the support level to watch whereas Rs 4,000 is the medium-term resistance level.

Gold

International gold and silver prices ended steady last week as the rally in the US Dollar stalled on lingering doubts over the pace of rate hikes by the US Federal Reserve.

The metals started positive as investors held off on big moves ahead of the US Thanksgiving holiday.

However, there has been a lot of back and forth language on whether or not the Federal Reserve will implement a neutral interest rate or will they take it above neutral, temporarily.

The Fed is widely expected to impose its fourth rate hike of 2018 in December, but investors have concerns over how many rate hikes the central bank can implement next year without risking a slowdown in the domestic economy.

Gold and silver also rose supported by fears of a slowing global economy, concerns surrounding Brexit and Italy’s fiscal situation, and uncertainty regarding the China-US trade negotiations.

Also adding to bullish sentiment was holdings at SPDR Gold Trust, which rose 0.43 per cent to 762.92 million tonnes this week.

Global stock markets have suffered in the past two months, pressured by worries of a peak in corporate earnings growth, rising borrowing costs, slowing global economic momentum, and international trade tensions. This has also been supporting bullion prices.

However, some recovery in the US dollar limited upside for bullion prices. The dollar rallied from a two-week low and benchmark US Treasury yields dipped to seven-week lows, as stock market declines boosted global demand for safe haven US Treasury debt and the dollar.

Domestic gold and silver prices tumbled as the domestic currency appreciated on the back of falling crude prices.

However, downside remained limited as physical gold demand in India was robust, as consumers stepped up purchases during the traditional wedding season.

Dealers in India were charging a premium of up to $2 an ounce over official domestic prices, down from $3 last week. The current price level was attracting both jewelers and retail consumers.

Looking ahead, investors are now keeping a close eye on G20 summit later this month in Argentina where US President Donald Trump is expected to meet with Chinese President Xi Jinping to discuss the bilateral trade dispute.

Markets are also waiting for a little more clarity on a possible December rate hike as well as the outlook for 2019. Gold is taking a sideways approach in this environment.

Technically, Gold December remained in downtrend and lost around 1.25 per cent last week. International Gold prices traded with positive bias and moved higher from $1,217.70 to $1,230 levels.

However, due to the appreciating trend of the rupee, domestic precious metals remained under pressure.

On a weekly basis, MCX Gold has formed Bearish candlestick pattern for a fourth consecutive week, which suggests that trend will remain in sell on rallies mode as long as Rs 31,000 level is intact on upside. On the daily chart, 10-day EMA has continued to provide crucial resistance to the down move, which suggests bearish momentum.

Now, further break below Rs 30,600 will add downside pressure. MACD has been moving in negative territory which suggests weak trend.

(Pritam Kumar Patnaik is Head of Reliance Commodities. Investors are requested to consult their financial advisers before taking any investment decision based on the observations made in this article)

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