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Commodity outlook: Crude oil likely to stay firm this week


By Pritam Kumar Patnaik

Crude oil prices witnessed some recovery this week after falling for three straight weeks. Both Brent and Nymex September contracts rose by over 2 per cent after falling more than 7 per cent and 5 per cent, respectively, over the last three weeks.

Prices started on the back foot as attention returned to oversupply risk. Saudi Arabia and other large producers are ramping up production to offset the anticipated supply deficit arising from the US imposed Iranian oil sanctions, due in November.

However, after a small fall, both Brent and NYMEX moved up, as the market shifted focus to the possibility of increased Chinese demand. Reports that China will increase infrastructure spending helped contain fears of reduced oil demand on the backdrop of US-China trade tensions. The prices got further boost after US government crude inventory data, which showed domestic crude inventories fell to their lowest levels since February 2015. The inventories fell by 6.1 million barrels in the week, as against market expectation of 2.3 million barrels. Crude stocks at the Cushing, Oklahoma delivery hub fell by 1.1 million barrels, EIA said, their lowest since November 2014.

Additionally, prices also found support after Saudi Arabia's Energy Minister Khalid al-Falih said the world's top exporter was "temporarily halting" all oil shipments through Bab El-Mandeb strait immediately, after an earlier attack on two crude vessels by the Iran-aligned Houthi movement.

Crude oil next week could remain firm amid geopolitical tensions as Saudi Arabia has halted crude transport through a key shipping lane. Falling US crude oil inventories and easing trade tensions between Washington and Europe could also support prices next week.

Technically, on the domestic front MCX Crude August Contract has managed to recover from the lows of Rs 4,559 and made high of Rs 4,812 level. This has given positive attempt on weekly basis after two weeks of downfall.

However momentum on daily as well as hourly chart is lacking till now. Hence we require close above Rs 4,850 level to confirm further positivity. Unless this happens, we can expect range bound action with Rs 4,550 as support on the downside.

US Soyabean remained extremely volatile during the week. The price action saw a movement from lows of $857 per bushel to a high of $896, a movement of 4.55 per cent.

Prices started on a weak note amid profit booking from the previous weeks rally. Concerns relating to further escalation in the US-China trades war weighed on the price. Additionally, USDA report improved US crop ratings, which showed that 70 per cent of the US soybean crop was in good to excellent condition, up from 69 per cent as stated last week and above market expectations of 68 per cent.

However, after the initial fall, prices surged higher on the back of reports that the US Agriculture Department will provide $12 billion in support to farmers and ranchers hurt by tariffs imposed on US products. The prices found additional support after the US and the EU agreed to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. They further added that they will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soyabean.

Looking at the above stated factors we expect to see further upside in the short run.

Technically on the domestic front, NCDEX Soybean October Futures has been trading in a broader range of Rs 3,420 and Rs 3,280 levels. Post the fall witnessed in the second week of July from Rs 3,532-3,280 levels, consolidation is ongoing. During such times it is ideal to wait for clear breakout, which is above Rs 3,420 or below Rs 3,280 levels. Bollinger Bands technique works well during rangebound action.

Spot Gold and domestic Ggold futures extended losses this week. Spot gold fell by $8.48 per ounce, while MCX futures fell by Rs 176 per 10 grammes.

Gold prices initially, did find support after the US dollar started on a weaker note after US President Donald Trump branded the dollar's strength as bad for the economy, knocking the currency from its one-year highs. A war of words between Trump and Iranian President Hassan Rouhani helped to lift prices, but only briefly.

Prices also found support after the dollar drop post US President Donald Trump and EU Commission President Jean-Claude Juncker, agreed to work towards eliminating trade barriers.

The dollar rebounded and the euro fell mid-week, after the ECB reaffirmed that it will end its stimulus program this year, saying the risks from an unpredictable global trade conflict did not warrant any deviation from its plan.

Fridays US GDP data is expected to be extremely bullish for the US Dollar. According to a Reuters poll, US GDP probably increased at a 4.1 per cent annualised rate. So a negative surprise could support gold prices. Looking ahead, gold prices could continue to track US dollar movements. The greenback could be supported by upbeat data from the country in the next few days. So the pain for gold may not be over soon.

Technically, on domestic front the MCX gold August contract has continued to trade below the psychological level of Rs 30,000 level and on a weekly basis, it has lost close to 1 per cent.

As long as we do not see close above Rs 30,000 level, trend will remain negative. On daily chart sideways action has also relieved the oversold state of RSI, which is a negative sign. The 10-day exponential moving average has continued to sustain below 20-day EMA, which indicates nervousness still exist in overall market. One should look for selling opportunity as long as Rs 30,000 level is intact on upside on the closing basis. On downside Rs 29,400-350 is the crucial zone to watch out for!

Internationally, Comex gold spot has failed to show any meaningful recovery till now and it has been continuously struggling to move above $1,235 levels. This itself indicates that bears have the upper hand. On the other side, US Ddollar index has been trading in narrow range of $94.20-95.50 levels. So as long as $94 is intact on downside, precious metals can remain under pressure. On daily chart Comex gold is intact in downward moving channel, which is negative sign. We can expect prices to move lower towards $1,205-1,200 is the coming week.

(Pritam Kumar Patnaik of Reliance Commodities analyses outlook of various commodities)

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