Brent crude eyes a spark, Opec meet to be next big driver

By Pritam Kumar Patnaik

The crude oil trajectory for the week gone by came up as mixed. While Brent showed little strength, NYMEX crude prices looked good.

As for NYMEX, the graph started off well and extended gains during the week. NYMEX prices were supported after a bigger-than-expected decline in US crude inventories along with surprise drawdown in gasoline and distillates indicated strong demand in the world’s top oil consumer.

US crude inventories fell 4.1 million barrels in the previous week, the Energy Information Administration said, exceeding analysts’ expectations of a drop of 2.7 million barrels. Estimated US gasoline demand hit a record high of 9.9 million barrels per day (bpd) in the week, the data showed.

IEA added that it expects global oil demand to grow 1.4 million bpd this year and in 2019, and top 100 million bpd in the fourth quarter of 2018. So, this has offset the rise in production from all major producers, including Saudi Arabia, Russia and the US.

On the other hand, global benchmark Brent moved in a small range during the week and was unable to break out.

Fundamentally, Brent prices suffered after Russian news agency Interfax reported that Russia’s oil production, the world’s biggest, had risen to 11.1 million bpd in early June, up from slightly below 11 million bpd in most of May and was well above its target production of under 11 million bpd as part of the deal.

Additionally, US crude production continues to rise week-on-week after the latest data from EIA showed that production rose to 10.9 million bpd in the previous week. This too has put pressure on Brent crude oil.

The spread between Brent and WTI futures has widened to as large as $ 11.52 per barrel. However, this week, NYMEX prices played catch-up with Brent. As a result, the spread narrowed to $ 9.23.

Looking ahead, the OPEC meeting on June 22 will be the key driver of the markets in the short term.

Saudi Energy Minister Khalid al-Falih expects a reasonable agreement next week when OPEC and non-OPEC oil producers meet. Russian Energy Minister Alexander Novak said members of the OPEC-plus may consider a production cut deal, returning up to 1.5 million bpd to the market gradually.

The short point is investors will await details of the meeting.

Meanwhile, some the weekly CFTC report suggests that OPEC could start increasing production caps by as much as 1 million barrels per day.

Data from CFTC showed that hedge funds and other money managers have slashed their bullish bets on US crude futures. The speculator group cut its combined futures and options position in New York and London by 18,839 contracts to 352,140 during the week to June 5. The move was the second consecutive cut.

Additionally, speculators in Brent crude cut their net long positions in the week by 13,810 contracts to 4,38,186.

Technically, crude futures of June contract stabilised near 4,305 level in the previous week and buying was witnessed at 4,375 to 4,575 levels. This has formed Morning Star candlestick pattern on weekly charts, which is a combination of three candlesticks.

If prices continue to sustain above 4,580 level, then further buying can emerge in this commodity. On the daily chart, prices are protecting the low of prior bar from last six sessions. So, as long as this continues, bias will be positive.

The level of 4,440 will provide important support whereas 4,630 will act as immediate resistance. Open interest has been increasing with the rise in prices, which is a positive sign. In the last four days, open interest has increased from 10,392 to 14,102.

Internationally, Brent crude futures prices have continued to sustain above $ 74 level and it has been moving in a consolidation with upside resistance at $ 77.50. It has formed Doji Candlestick pattern and the psychology behind the same indicates a halt in the downmove or reversal in the trend. The low of Doji candlestick $ 73.80 is crucial level to watch. Now, let us see which way a breakout takes place.

Natural gas
US natural gas prices recovered much of their earlier losses. The futures on the NYMEX rose by almost 2.5 per cent.

The previous week started on a weaker note. According to Bespoke Weather Services, a cool spell across the centre of the country into the Ohio River Valley was seen as potentially pulling down cooling demand below seasonal averages temporarily.

However, after a weak start, natural gas prices recovered most of the losses, primarily on the back of an increase in net long positions by hedge funds in the futures. CFTC data showed that the funds raised their net long positions in US natural gas futures and options 2.3 per cent to 192,577 on May 29–June 5. The figure rose 98 per cent or 95,127 contracts on-year.

Additionally, lower inventories and strong demand have supported natural gas prices.

According to US Energy Information Administration data, total stocks stand at 1.913 trillion cubic feet, down 785 billion cubic feet from a year ago, and 507 billion cubic feet below the five-year average. However, weekly data showed that domestic supplies of natural gas jumped 96 billion cubic feet for the week ended June 8.

Looking ahead, weather will be a key market driver. Warmer weather could prop up prices.

Technically, for MCX natural gas June contract for April 2018, short term trend of this energy commodity reversed on the upside and since then, higher high and higher low pattern has continued. From the last three months, prices are intact in an upward moving channel.

Recently, it has broken out of short-term consolidation pattern, which suggests resumption of an uptrend. It is likely to move higher towards 209-210 in coming weeks. On downside, 197-198 is an important support.

Internationally, as for natural gas (dollar terms), the short term uptrend is intact as prices have continued to protect the immediate support areas. Prices are on verge of breaking the short-term sideways pattern and hence, in the coming week, we can witness continuation of the uptrend. Break of $ 3 can take prices towards $ 3.15-18, with $ 2.88-85 as a key support on the downside.

Silver prices continued to move higher in the week before, spurred by a base metal rally and taking support from the fall in the ratio between gold and silver prices.

Despite the rate increase from the Fed, silver is continuing to move higher and starting to outperform gold by a good margin. Silver/iShares Silver Trust rose this week despite the Fed’s decision to increase the Federal funds rate by another 25 basis points. Perhaps, even more significant is the fact that SLV has appreciated by about 5 per cent over the past several trading sessions leading up to the Fed decision.

In addition, the gold to silver ratio is beginning to come off extreme highs. Silver is looking to leave gold behind. The gold-silver ratio has fallen below 77 and could even go below 76. The ratio at one point was at 75.67 in Asian trade. Technically, the support for the ratio is at 75 levels and any breach below this level could pull the ratio all the way down to 70. So, if the ratio continues to fall, silver will outperform gold.

Hedge funds and money managers raised net long positions in silver futures and options, CFTC data showed. Silver dealers raised their net long position by 3,431 contracts to 4,295. This was the strongest net long position since late April.

Going forward, dollar movement will be a key metric for silver. The greenback reversed losses and rallied modestly on the ECB action after being under selling pressure overnight. While the ending of QE appears hawkish, currency traders beat the euro down on the wording that the ECB intends to keep interest rates at present levels through at least 2019.

Technically, for MCX silver july futures for May 2018, prices struggled twice and failed to break above 41,000 mark. However, this time, silver broke above the same and till now, it has showed strong momentum towards 41,620 levels.

However, one should not be too optimistic at current levels as prices have reached towards the resistance zone. If it manages to close above 41,700, a further rally can be expected. Otherwise, expect range-bound action between 40,800 and 41,650 level for now.

Internationally, Comex silver spot has risen 6.18 per cent, from a low of $ 16.32 to a high of $ 17.32. However, one should adopt a cautious approach now as prices have entered the zone where sellers were active in the past. Near the resistance zone, one should always trade with caution. The important hurdle is $ 17.36 and if this level is taken out, the target towards $ 17.70 can be expected.

Unless this happens, expect prices to trade in a range of $ 16.70 and $ 17.20. On the weekly chart, prices are trading at the upper band of Bollinger and hence, it’s time to be cautious.

US soybeans crashed by over 6 per cent this week on the back of favourable weather conditions in the US. Indian prices also tracked international trend and turned lower this week. However, domestic prices also crashed this week due to weak demand for soybean meal and higher acreage expectations.

Mostly warm and wet weather in the Midwest acted as a negative factor for July soybean futures even as meteorological forecasts called for more rains across the western Plains and northwest portions of the Midwest next week.

Elevated trade tensions between the United States and major trading partners like China, Mexico and Canada pushed down soybean prices amid concerns about slower export demand.

US President Donald Trump has decided to impose tariff on $ 50 billion worth of Chinese goods, a move that could put his trade policies on a collision course with others. He is also trying to get rid of the Korean Peninsula of nuclear weapons. China has said that it’s prepared to retaliate should the US proceed with the additional tariffs.

Meanwhile, some respite for soybean prices was seen after the USDA pegged soybean ending stocks for the 2017/18 crop year at 505 million bushels, down from 530 million bushels a month ago. It boosted its soybean usage by crushers to 2.015 billion bushels, up 25 million bushels.

For the 2018-19 marketing year, the USDA estimated soybean ending stocks at 385 million bushels, down from its May estimate of 415 million bushels. The lower stock figure was largely due to a smaller carry-in from 2017-18. Additionally, the 2018-19 crush estimate was raised by 5 million bushels.

Meanwhile, the Commodity Futures Trading Commission’s weekly commitments of traders report also showed that non-commercial traders, a category that includes hedge funds, cut their net long position in soybeans. According to data from CFTC, bets on higher soybean futures plunged to 65,177 contracts last week, down from 1,03,590 a week earlier.

Prices could continue to move lower as benign weather across the US Midwest raised hopes for a bumper harvest. But concerns over Chinese demand persisted.

Domestically, prices have also corrected on the back of a good start to the monsoon season this year. More rains could prompt farmers to plant more soybeans. Prices could continue to correct further backed by good progress of rainfall till the first week of June.

However, over the last few days, according to IMD, rainfall has temporarily paused due to weakening of monsoon circulation pattern. But it would revive soon. Over the next few days, rainfall progress needs to be monitored.

Technically, for NCDEX Soybean July Contract, panic selling was witnessed towards 3,361 level and from there rebound in prices has been observed. However, this only looks like a temporary bounce to relieve the oversold state of RSI.

Till now, there is no reversal sign and hence medium term trend will remain on downside. As long as prices stay below 20-day EMA, trend will remain on downside. On the upside, 3,550 is the important resistance and break below 3,420 will infuse selling pressure towards 3,310.

Internationally, US soybeans futures saw selling pressure. In the last 3 weeks, prices have tumbled from $ 1,050 to $ 918 level. There is no attempt from buyers yet and hence strong momentum on the downside likely to take prices further lower towards $ 900-890 in coming weeks. On the upside, $ 940 is the crucial resistance.

NCDEX Turmeric July contract U-turn in the current week was witnessed as prices gained more than 5 per cent from the low of 7,127 and made a high at 7,498. It has taken support at the 61.8 per cent retracement of the prior rise and has formed bullish candlestick pattern after 5 weeks of selloff.

This indicates that trend has reversed on the upside and in coming weeks, we can expect prices to travel towards 7,650 followed by 7,800. On the downside, 7,200 will act as support.

(Pritam Kumar Patnaik is Business Head at Reliance Commodities. Readers are advised to consult their financial advisers before taking any position based on these observations)