By Pritam Kumar Patnaik
Crude oil prices extended gains this week, backed by looming US sanctions on Iran's oil exports and falling Venezuelan output and US inventories.
The prices started on an upbeat note on tailwinds such as rising equities and news that the US and Mexico agreed to overhaul the North American Free Trade Agreement (NAFTA).
According to a Reuters report, an OPEC and non-OPEC monitoring committee found that oil producers as part of a supply reduction agreement slashed output in July by 9 per cent more than what was called for in their pact. This also gave prices some life.
There is a view that the oil market will tighten when US sanctions targeting OPEC member Iran's oil exports kick in from November. While the Iranian sanctions issue is not new, suggestions from the White House that waivers will be restricted appeared to prop up the prices this week as well.
China's independent refiners have ramped up their foreign oil buying after returning from prolonged summer maintenance to gear up for rising winter fuel demand, a sign that the financial pain from taxes and higher crude prices have ebbed for now.
The independent refiners imported 6 million MT, or 1.4 million barrels per day (bpd), of crude in August, up 40 per cent from July and 10 per cent higher than the same period last year, Thomson Reuters Oil Research and Forecasts data showed.
Official US oil inventory data on Wednesday also fuelled the bullish trend. US commercial crude inventories fell by a larger than expected 2.6 million barrels to 405.79 million barrels in the week to August 24, the Energy Information Administration said. US production was flat from the previous week's record of 11 million bpd.
Looking ahead, the prices could stay in the current range amid a firm demand and falling supplies. The International Energy Agency (IEA) has warned of a tightening market towards the end of the year because of falling supply in countries such as Iran and Venezuela combined with strong demand, especially in Asia. However, upside could be limited on concerns that the trade war between the United States and China could intensify.
Domestically, crude oil prices were tracking the overseas trend. One theory attributes the rise in the prices to the weakening of the rupee. The Indian unit has weakened over the last 2-3 weeks and has pushed up the domestic prices. So, apart from firm overseas prices, domestic crude could track a falling rupee.
Technically, on the domestic front, MCX Crude September rallied for the second consecutive week and made a weekly high of Rs 5,013 level, gaining gained 4.52 per cent. This has made bullish candlestick pattern, which suggests that the trend will remain on the upside in coming weeks.
The rise has been witnessed along with increase in open interest, which is at 19,559 contracts compared with 11,730 last week. This clearly suggests that a majority of market participants are bullish. The channeling technique suggests that the trend can continue towards Rs 5,350-5,400 levels. On the downside, Rs 4,800 is the support.
Internationally, Brent Crude futures rose sharply and gained 3.44 per cent. This price action of last two weeks is clearly indicating that downmove witnessed towards $70.30 level was only a retracement of the prior rise and the recent rise signals that the upward trend has resumed.
The prices have been protecting 30-week exponential moving average very well, which is a proxy for the uptrend. It will be important to see if the prices manage to close above $80 levels or not. Any close above $80 will take prices towards $83.50 levels. On the downside, $75 is the support.
Gold and silver remained extremely volatile this week, but was last seen trading on a weaker note.
Their prices started the week on an bullish note as the dollar weakened after the US and Mexico struck an agreement that lowers trade tensions.
Reuters reported that the US and Mexico agreed to revamp the North American Free Trade Agreement (NAFTA), putting pressure on Canada to agree to the new terms on auto trade and other issues as part of the three-nation pact.
However, after the upside movement, gold lost some momentum after breaching the $1,200 mark as the dollar rebounded from lows of the week to move higher.
Data showed that US gross domestic product grew at a 4.2 per cent annualised rate, the Commerce Department data showed in its second estimate of GDP growth for the second quarter. That was slightly up from the 4.1 per cent pace of expansion in July. The data cemented expectations for a US rate hike next month, with a 96% probability, according to Fed funds futures.
Looking ahead, prices on the upside may be capped as higher rates, even if they come at a gradual pace, raise the opportunity cost of holding gold, which can be costly to store and insure.
Gold prices were also weighed down after investors reduced their positions ahead of the long US holiday weekend. US markets are shut on Monday for Labour market holiday.
We also believe that gold would closely track moves in the dollar, in which the metal is priced, especially with investors bracing for the next round of the US-China trade conflict.
Investors continued their liquidation of exchange traded funds even after gold prices recovered from 1-1/2-year lows of $1,159.96 hit earlier this month.
Hedge funds and money managers increased their net short positions in Comex gold contracts to another record in the week to August 21, US Commodity Futures Trading Commission (CFTC) data showed last week. Gold speculators added 1,306 contracts to their net short position, bringing it to 78,579 contracts, the largest since records became publicly available in 2006.
So, the ongoing outflows from ETFs, record high speculative shorts and upbeat US economic data are still the major headwinds for gold and signify the recovery might be short lived.
On the domestic side, rupees weakness over the last two weeks has been supporting its prices. The rupee has depreciated by over 2 per cent over the last 2-3 weeks. We believe that the rupee could continue to weaken further due to the spillover of emerging market problems. Additionally, escalation of trade war between WAshington and Beijing could also indirectly impact the rupee as the Chinese yuan could weaken further.
Meanwhile, local news reports suggested that gold is selling at a premium of $1 per ounce in the domestic market with demand picking up ahead of the festive season. So, a firm festive demand and a weak rupee could continue to limit the downside of gold prices in the domestic markets. However, weakening overseas prices could prompt investors to wait for dips before buying.
Technically, on the domestic front, MCX Gold October contract continued to move higher for the second week after forming a low at Rs 29,268 levels. It has gained around 1.44 per cent on weekly basis.
The prices are sustaining above 5-weeks exponential moving average, which suggests that the trend has changed to upside and now buy on dips can be used as an ideal strategy. On the downside, Rs 29,880 is the medium term support level. Its prices have retraced the last leg of the downmove faster, which further confirms that the bulls have an upper hand. We can expect gold to move higher towards Rs 30,900 in coming weeks.
Internationally, Comex Gold futures were volatile where it made a high of $1,214 level and low of $1,195.90. This has made Doji weekly candlestick pattern post the bullish candlestick pattern in the previous week.
On the daily chart, it has broken the small downward moving channel suggesting that the trend is reversing on the upside. The gap between 10- and 20-day exponential moving average is becoming narrow, which suggests that the downside momentum is subsiding.
Any close above $1,220 level will confirm the further positive bias and then, move towards $1,260 can be expected. On the downside, $1,180 acts as the support.
(Pritam Kumar Patnaik of Reliance Commodities analyses outlook for various commodities)