Markets

Commodity outlook: Crude, metals & bullion sway to trade war swings

By Pritam Kumar Patnaik

Crude prices showed extremely volatility during the week gone by while US-China trade war weighed on base metals and some agro-commodities like soya. Heres a detailed look at how last weeks movers and shakers of the commodities mart.
Crude in seesaw trade
Crude prices were extremely volatile during the week ending July 13, 2018. Brent September contract on ICE tested a high of $79.51/barrel during the initial half of the week. However, after the initial high, both NYMEX and ICE prices fell during the week, with Brent September falling by almost 7% in a single session.

Crude started the week on a positive note on looming sanctions on Iran and falling output in Libya. The US said it wanted to reduce oil exports from Iran, the worlds fifth-biggest producer, to zero by November, which would oblige other big producers to pump more.

Prices also found support as market focus returned to concerns about spare capacity following a warning from the International Energy Agency (IEA). The worlds oil supply cushion could be stretched to the limit due to prolonged outages, supporting prices and threatening demand growth, the International Energy Agency said.

However, after the initial strength, Brent crude September contract had its biggest one-day drop in two years mid-week as escalating US-China trade tensions threatened to hurt oil demand and on news that Libya would reopen its ports raised expectations of growing supply.

Domestic crude oil prices also tumbled over 7.5% from the highs of the week, tracking weak overseas prices. Crude MCX July was last trading at Rs 4,811 a barrel on Friday morning. The high of the week was Rs 5,132 a barrel, while the low was Rs 4,737 a barrel.

Looking ahead, crude prices could remain mixed in the coming week as markets digest big swings earlier in the week that have left both major benchmarks facing a second weekly loss and largely shrugged off a warning about tightness in spare capacity.

Further news on the US-China trade tensions could continue to hurt demand for oil.

Chinas crude oil imports fell for a second month in a row in June to the lowest since December. June shipments came in at 34.35 million MT, or 8.36 million barrels per day (bpd), according to data from the General Administration of Customs. That was down 9% from 9.2 million bpd in May

and also down from 8.8 million bpd in June last year.

On the other hand, with Libya starting exports and U.S. shale oil just continues to grow and then it depends on what goes on with OPEC. The Organization of the Petroleum Exporting Countries (OPEC) and other key producers including Russia has responded to the recent market tightness by easing a supply-cut agreement.

So the news and fundamentals looks mixed, so prices fundamentally, looks mixed in the next week or so.

Technically, on domestic front, MCX Crude July futures tumbled from the high of Rs 5,173 and made a low of Rs 4,737 level. This has broken the 10 days Exponential moving average, which was providing support till now. Now the same EMA will act as resistance on upside. The short-term trend has changed to sell on rallies now. On a weekly basis there is formation of big bearish candlestick pattern which suggest the bears have the upper hand now. On upside Rs 4,900-4,950 will act as strong resistance now and in coming sessions we can expect prices to move lower towards Rs 4,600-4,550 levels.

Internationally, Brent Crude futures crashed from the high of $79.43 to the low of $72.74 levels. Post the fall prices are in consolidation mode and it has arrived near the crucial support zone. On a weekly basis there is formation of bearish candlestick pattern which indicates negativity. Now, $72.50 is the important level to watch. Any close below $72.50 will take prices further lower towards the $70 level. On upside $77 is the resistance.
Base Metals
Most base metals tumbled this week on the back of rising trade tensions between US and China.

Copper 3M forward on LME fell over 5.5 per cent from the highs of the week. Lead 3M forward on LME fell 9.76 per cent from the highs of the week. Zinc 3M forward on LME fell 9.62 per cent from the highs of the week. Finally Aluminium 3M forward on LME fell by 4.80 per cent from the high of the week.

The only metal which escaped the fall is Nickel, which rose over 6 per cent from the lows of the week, on the back of rising stainless prices in China. Steel Rebar July futures contract on Shanghai Metal prices rose by 3.31 per cent.

Chinese steel prices rose amid news that Chinese steel exports rose even as strong international prices and a weak yuan meant shipments continued to defy US tariffs. Chinas steel product exports for June climbed 1.9 per cent year on year to 6.94 million MT, their highest since July 2017. The exports also nudged up from 6.88 million MT in May amid higher output in the second quarter and stronger global prices.

Steel prices also rose when the countrys biggest steelmaking city, Tangshan, said it would deepen output curbs over the summer, raising concerns of tight supplies in the market.

Tangshan, home to 64 steelmakers, has ordered steel mills, coke producers and utilities to cut output further starting from July 20 until August 31, according to a document from the city government.

This is the latest step to curb smog in one of the countrys most polluted areas.

Meanwhile, rest of metals remained weak during the week amid reports that Chinas three-year action plan to curb air pollution by 2020 has extended its reach into cities where the problem is worsening.

A large smelting capacity for copper, zinc and lead is located in the target area and will need to either upgrade to meet new emission norms or face production curbs.

Zinc prices fell to their lowest in more than a year this as expectations of rising supplies and a narrowing deficit sparked a sell-off that accelerated after prices fell below key technical support levels.

Industrial metals overall came under pressure from a higher US currency, which makes dollar-denominated commodities more expensive for non-US firms. The US dollar rose by 1.26 per cent from the lows of the week.

Copper was also influenced by news reports that Indonesia struck an agreement with Freeport-McMoRan Inc and Rio Tinto to buy a controlling stake in the worlds second-biggest copper mine, Grasberg. This according to many analysts and investors could increase supply of copper in the market.

Fundamentally, Chilean copper production increased by 6.1 per cent in May from a year earlier to 494,500 MT in its best monthly performance so far this year, driven by the countrys largest mines, Chilean copper commission Cochilco said.

Chile, the worlds largest copper producer, added 2.36 million MT between January and May, a year-on-year increase of 13.5 per cent.

State-owned Codelco produced 681,000 MT from January to May, an increase of 2.4 per cent from the same period a year earlier, while mining company Escondida, controlled by BHP, more than doubled its year-on-year production to 545,600 MT between January and May.

Looking ahead, prices have fallen significantly over the last few weeks amid rising trade tensions and domestic factors in China. Prices could see more weakness if tensions between US and China increase. A softer stance from the US, however, could limit further weakness in base metal prices.

Technically, on domestic front, MCX Lead July Futures has crashed from the high of Rs 171.60 to a low of Rs 146.15 till now in last five weeks. The current weeks fall was the huge one where it lost 10.40 per cent. The 5-day exponential moving average is acting as resistance to the down move. So, only a close above Rs 153 level will suggests that trend has reversed and unless this happens trend will remain on downside. In current market it is better to adopt sell on rallies approach with Rs 153 acting as resistance. On downside, next support directly placed at Rs 143 level.

Internationally, LME lead futures have moved lower from $2,540 to the low of $2,140 levels.

This price action has broken the upward moving channel which was intact since 2016 for the first time. This indicates medium term reversal in trend towards downside. As of now prices are in oversold state and thus some pullback towards $2,250 is possible which will provide selling opportunity. On downside next major support is placed at $2,100 levels.

Technically, on domestic front, MCX Zinc July Futures broke 50 weeks exponential moving average in the end of June 2018 and since then prices have continued to be under pressure.

This week also, it moved lower from Rs 191.70 to the low of Rs 173.60. The overall trend will remain in sell on rallies mode with Rs 183-184 zone as important resistance. We can expect some range bound action to relieve the oversold state of RSI and then move towards the Rs 171 level can be expected.

Internationally, LME Zinc Futures continued to move lower with strong momentum and crashed from $2,785 to a low of $2,510. It has continued to form bearish candlestick pattern from last few weeks which clearly indicates weakness. Any rally towards $2,650 should be used as selling opportunity. On upside $2,770 is important resistance. On downside prices can move lower towards $2,430 level.

Gold and Silver
Gold and silver prices remained weak this week as well as the Greenback rebounded against a basket of currencies this week on the back of US-China trade tensions.

International gold spot prices were last trading at $1244.73/Oz, while International silver spot prices were last trading at $15.89/Oz this Friday afternoon in Asian trading. The high for gold and silver was $1265.87/Oz and $16.214/Oz respectively during the week.

Gold and silver started on an upbeat note after the dollar fell after the euro rose against the greenback after European Central Bank Governing Council member Ewald Nowotny said the bank could decide this month to end bond buying by the end of this year.

Additionally, safe have demand returned in the market after, Britains Brexit Secretary David Davis resigned to try to stop Prime Minister Theresa May from handing too much power to the European Union.

However, after the initial upside, prices started correcting weighed down by a stronger US dollar. The US dollar found support after US threat of tariffs on an additional $200 billion of Chinese goods pushed safe-haven flows to the US dollar and dashed hopes that Washington would eventually step back from the escalating row.

Looking ahead, a strong US dollar could continue to weigh on prices. Demand from India has slowed down as rural demand remains weak. However, a further fall in prices could spur demand from India. Indian dealers were charging a premium of up to $1.50 an ounce over official domestic prices in the week ending July 6, compared to a discount of $2 in the previous week.

However, gold supplies are limited due to lower imports in the last few weeks. Indias gold imports fell for a sixth month in June to 44 MT as a drop in the rupee to record lows lifted local prices to a near 21-month high, curtailing demand, provisional data from Thomson Reuters showed.

According to a Reuters poll, gold imports into India, the worlds second biggest buyer of the metal, could drop by 18 per cent in 2018 from a year ago as rising prices and a falling rupee have dented demand from retail jewellery buyers.

This years imports are likely to be 725 MT, according to the median of responses from 12 industry participants in the poll. The range of responses was between 650 MT to 800 MT. India imported 880 MT of gold in 2017, according to data compiled by precious metals consultancy GFMS, a division of Thomson Reuters.

Technically, on domestic front, MCX Gold August Futures showed massive weakness in which prices lost from the high of Rs 30,778 to the low of Rs 30,108 this week. Since last five weeks, it has been failing to close above prior bars highs. So as long as this continues trend will be on downside. The 10-week EMA has been acting as resistance to the down move. The trend will remain in sell on rallies mode with important resistance at Rs 30,300 followed by Rs 30,420 levels. On the downside, it is expected to move lower towards Rs 29,900 level in the coming sessions.

Internationally, Comex Gold spot continued to be under pressure since it broke below $1,300 level in May, 2018. Prices have now arrived at the crucial support zone and thus action will be important from here on. Any breach of $1,235 level will increase further selling pressure towards $1,210 levels. The US dollar index has been trading on stronger note, which is likely to keep precious metals under pressure. On the upside, $1,260 is the resistance. As long as prices sustains below 10-week EMA, the trend will remain on downside.

Soybean tumbling

Soybean prices on CBOT tumbled this week again; you guessed it US-China trade tensions.

However, upbeat weather conditions in the US and higher carry-forward stocks for 2018-19 also weighed on prices.

Demand for US soybeans from China could slow down this year as investors expect the Chinese demand could slow down following Beijings tariffs on US supplies.

China cut its forecast for soybean imports for the 2018/19 crop year, warning that higher prices due to trade conflict with the US would curb demand as farmers switch to alternative ingredients for their animal feed.

Imports of soybeans in the crop year that starts on October 1 will be 93.85 Million MT, down 1.8 Million MT, or 2 per cent, from last months estimate, the ministry of agriculture and rural affairs said in its monthly crop report.

That compares with its estimate of 95.97 Million MT for the 2017/18 crop year and, according to US government records, would be the lowest import level since 2016/17.

Expectations that Beijings extra 25% tariff on US soybeans will shift more sales to Brazil, the worlds top exporter, has contributed to a five-year high in the spread between US and Brazilian prices.

Data from Reuters showed that the spread between US and Brazilian soybean prices offered in China has widened to a five-year high of more than $70/MT, including cost and freight, as a trade row between Washington and Beijing deepened.

Chinese buyers are importing Brazilian soybeans at around $425.85/MT, C& F, compared with US beans quoted at $355.22/MT, in the week ending July 6, 2018.

Soybean futures also fell after the US department of agriculture pegged the condition of the US crop above market forecasts, stoking expectations of bumper production.

Meanwhile, private forecaster Conab sees Brazils 2017/18 soybean crop seen at 118.88 MT vs. 118.05 MT prior forecast and 114.08 MT last season. Analysts estimates in a Reuters survey had pegged 2018/19 soybean ending stocks in a range from 390 million bushels to 571 million bushels.

The government cut its export projections for soybeans by 250 million bushels to 2.040 billion bushels. It was the second biggest monthly cut to soybean exports.

USDA also raised its outlook for the 2018/19 soybean harvest to 4.310 billion bushels, up 30 million bushels from its previous outlook. It left its yield forecast unchanged at 48.5 bushels per acre.

Looking ahead, soybean prices could continue to move lower if US-China trade tensions now escalate into a full blown trade war over the next few days. However, some short covering could be seen over the next few sessions as prices have fallen significantly.

However, weather conditions will be important to determine the crop conditions in the US and favourable weather will continue to weigh on prices.

On the Indian side, domestic soybean prices active October contract also fell this week, tracking weak overseas prices and favourable weather for sowing the soy this year. However, sowing for Kharif oilseeds is lagging behind compared to last year according to data from the government. Data from the ministry of agriculture and farmers welfare showed that oilseed has been sowed in at 63.59 lakh hectares compared with 73.45 lakh hectares sown same time last year.

However, according to the Indian Meteorological Department (IMD), during the past week, southwest monsoon was above Peninsula by 20% and 34%, respectively. During the week, the country as a whole, the rainfall was however, below the long period average by 14% as rainfall lagged in northwest of the country and east and northeast of the country.

So weather will be key in the next few weeks for the sowing expectations and development of the crop.

Demand from China will be key after Chinese Cabinet announced a lift of import tariffs on soybean and a few other goods from India and four other Asian nations from July 1. The import tariff on soybean was three per cent earlier. The Chinese cabinet said that it will lift duty on related products such as soy meal, soybean cake, rapeseed and fish meal for the Asian countries.

Technically, on domestic front, NCDEX soybeans October Futures crashed in current week as prices broke below the important support of Rs 3,400 levels. The trend has changed on downside as the momentum is strong on downside. Prices failed to sustain above 50-day EMA so, now same EMA will act as resistance. The trend has changed to sell on rallies. We can expect some pullback which will be short lived and provide a selling opportunity. On upside Rs 3,380-3,400 will act as resistance. On downside it is likely to move towards Rs 3,230-3,200 levels.

Internationally, US soybeans futures failed to hold above $840-850 levels and continued to move lower with strong momentum. There is no sign of relief as of now as prices have been trading below short term as well as long term moving averages.

In the coming week, we can expect it to move further lower towards $800 level and thus any rallies will be short lived in nature.

Original Article

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *