Crude oil may move in a thin band, gold caught on a sticky pitch too

By Pritam Kumar Patnaik

Crude prices remained extremely volatile during the week. NYMEX September range during the week marked a high of $ 70.43 and a low of $ 66.92, a total movement of almost 5%. Brent also remained extremely volatile during the week, with active October futures witnessing a movement of 5.21 per cent.

Brent ended lower during the week while NYMEX ended with marginal gains.

Domestic crude was also extremely volatile and closed on a mild positive note tracking overseas prices like NYMEX crude that ended with gains.

Crude started the week on an upbeat note as traders continued to focus on supply disruptions and a possible hit to crude output from US sanctions on Iran.

However, after the initial upside movement, prices started to correct on supply worries after OPEC output reached a 2018 high in July, overshadowing reports that the United States and China might reopen trade talks that could push up demand.

A Reuter’s survey showed that the production increased in July on the rise in production, mainly from Kuwait, Saudi Arabia, and Iraq. Their production increased by 80,000 bpd, 50,000 bpd, and 40,000 bpd, respectively, in July.

Among the countries with lower output was Iran, which witnessed the biggest drop of 100,000 bpd as exports fell. Returning US sanctions discouraged companies from buying the country’s oil. Output in Libya and Venezuela also fell in July.

Additionally, industry group American Petroleum Institute said US crude stocks rose unexpectedly last week while gasoline inventories decreased and distillate stocks built. The government’s Energy Information Administration (EIA) said US crude inventories rose 3.8 million barrels last week as imports jumped. This also weighed on prices.

However, after the fall, oil rose again by the end of the week after the EIA reported that US crude production fell 30,000 barrels per day to 10.44 million bpd in May. Oil prices were also supported by the bullish element in the US inventories report, which talked of gasoline stocks declining by 2.5 million barrels. Also, crude stocks at the Cushing, Oklahoma, delivery hub for WTI futures were down, dropped by 1.3 million barrels, EIA data showed.

Looking ahead, a rise in production from OPEC could pressure oil prices, which could also be pressured by concerns that global trade tensions could crimp economic growth. However, unexpected supply outages from Libya and Canada, sanctions on Iran, and the drop in Venezuela’s production due to mismanagement could help oil. So, we expect that oil could continue to remain data driven in the next few days till more clarity emerges on the OPEC output situation.

Technically, on the domestic front, MCX Crude August Futures rebounded sharply from the low of Rs 4,590-4,600 level on Thursday (August 2). The bounceback has taken place exactly from the upward moving channel support, which is intact over the last few months. It has retraced 61.8 per cent of the prior rise and now it looks to be ready to resume the medium term upmove.

The 100-day EMA is providing crucial support to the upside and this time also, prices bounced back from the same. On the daily chart, there is formation of bullish candlestick pattern, which suggests a positive signal. Now a close above Rs 4,850 suggests that upmove towards Rs 5,300 level has started. On the downside, Rs 4,585 is the support.

Internationally, Brent crude futures have been managing to protect the support zone of $ 71.20-71 levels. As of now, recovery has been witnessed towards the $ 73.76 level, which indicates that it might be forming base at lower levels. It has been holding well above crucial channel support, which indicates that bulls may take control over prices. So, any move above $ 75.30 level will suggest that an upside trend has started towards $ 79.50. Till that time, expect range bound action.

International gold and silver prices tumbled during the week, with spot gold and silver easing 1.39 per cent and 1.02 per cent, respectively.

US gold and silver futures for December delivery plummeted 1.50 per cent and 1.23 per cent, respectively.

Domestic bullion prices also tracked overseas prices and dropped this week. MCX August futures fell by almost 1% while September silver came off by 1.37 per cent.

Bullion was under pressure because of a stronger US dollar, supported by a hawkish Fed meeting. The dollar rose by almost 0.5 per cent this week.

Bullion was initially supported by talks that US and China were trying to restart negotiations to defuse a trade war. The Chinese yuan had appreciated briefly against the greenback supported by these rumors.

However, bullion got the blues after the Fed meeting. The Fed, after a two-day meeting, characterised the US economy as strong, keeping the central bank on track to increase borrowing costs in September.

The Federal Reserve said economic growth has been rising strongly and the job market has continued to strengthen while inflation has remained near the central bank’s 2 per cent target since its last policy meeting in June, when it raised rates.

This is consistent with what Fed chief Jerome Powell told Congress: the economy is doing really well right now. The US economy grew at 4.1 per cent in the second quarter, its best showing in nearly four years, as consumers boosted spending and farmers rushed shipments of soybeans to China to beat retaliatory trade tariffs, Commerce Department data showed.

The US central bank expects another two rate rises by the end of the year. Federal funds futures implied traders are pricing in chances of about 91 per cent for a rate increase in September and 71 per cent for an additional hike in December, according to CME Group’s FedWatch programme.

Hedge funds and money managers increased their net short position in Comex gold contracts to a record in the week to July 24, US Commodity Futures Trading Commission (CFTC) data showed. They also increased their bearish positions in silver futures and options, according to the data.

In gold, hedge funds and money managers added 5,001 contracts to their net short positions, bringing it to 27,156 contracts, the biggest on record dating back to 2006, when the data became publicly available, CFTC data showed. In silver, they increased their net short positions by 3,474 lots to the biggest in 10 weeks at 11,343 lots, CFTC data showed further.

Looking ahead, with the US economy expected to do well and the Fed potentially hiking rates at least 2 more times, bullion prices could continue to weaken in the next few weeks. Some respite could be seen for the prices if the trade war between US-China escalates further. We believe that future prices could be linked to data and movement of the greenback.

Technically, on the domestic front, MCX Gold has continued to move under pressure and has reached close to the psychological mark of Rs 29,500 levels. On a weekly basis, it has lost around 1.22 per cent. This is for the eight straight week where prices have failed to close above prior week highs and formed a bearish bar.

It has continued to trade below 20-day EMA, which is going to keep bias on the negative side. MACD has been moving below signal line and 0 levels, which suggest no sign of reversal yet. As long as Rs 29,900 is intact on the upside, one should adopt sell on rallies strategy.

Open interest has continued to increase from 7,500 contracts to 8,092, along with the fall in prices. On downside, it is expected to move lower towards Rs 29,300-29,250 levels.

Internationally, Comex Gold spot took out the prior week low of $ 1,211.50 and made a low at $ 1,206.30 till now. It is near the support of $ 1,204 levels. On the daily chart, the prices have continued to move lower in a step by step manner. There is no sign of reversal yet and there is continuous formation of bearish candlestick pattern, which will keep trend on downside.

Any close below $ 1,204 level will take prices towards $ 1,185 levels. On the upside, $ 1,221 is going to act as a resistance.

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