By Pritam Kumar Patnaik
The crude oil prices remained extremely volatile in this weeks trading. Prices started on the front foot supported by the 17 months of cuts by major oil-producing countries, led by Saudi Arabia and Russia. IEA (International Energy Agency) recently said the curbs by the oil cartel Opec and partners have brought global oil supply and demand back into balance.
Additionally, geopolitical uncertainty in the Middle East also supported prices. The US President Donald Trumps decision to unilaterally exit the nuclear deal with Iran caused market to price in the impact of Iranian crude exports falling. Iran produces around 4 per cent of global oil supplies.
Finally, the political and economic crises affecting the oil-rich South American country Venezuela have resulted in its crude production going into freefall.
However, after a positive start to the week, crude fell by more than 5 per cent from its weekly high amid political worries in Italy. Italy's political crisis deepened and raised the likelihood of an early election that some market players fear could lead to a euro sceptic government in Rome. Additionally, a report in the market that Saudi Arabia and Russia could reach a deal to increase oil production after more than a year of holding back output also weighed on prices.
Again after the fall, crude bounced back from the lows of the week after the Energy Information Administration reported a draw in crude oil inventories of 4.2 million barrels for the week to May 25, a day after the API pressured benchmarks by estimating an unexpected inventory increase of 1 million barrels for the period. Analysts had expected a build of 920,000 barrels for last week, after a 5.8-million-barrel increase a week earlier.
Crude now could remain in a range. Fundamentally, Opec and its allies are set to meet in Vienna on June 22. So any extension of cuts beyond 2018 (expiry of the Opec deal) could continue to support a move beyond $90/barrel. However, if Opec does not extend beyond 2018 then more correction towards $65/barrel can be expected.
So we believe that the prices could remain in the range till the meeting is out of the way. Of course, the data will be important in the next few weeks with regards to the US output and crude oil inventories and the short term movement could be decided according to the data.
Technically, Brent oil futures, after the continuous rally of six weeks from $67.14 to $80.50 levels, in the seventh week prices finally took resistance at $80.50 levels and tumbled down towards $74.55 level. In the last week recovery towards $79.12 levels was witnessed. This entire price action suggests that we can expect consolidation to start in this commodity between $80.50 and $72.50 levels.
There is formation of bearish candlestick pattern and it gave a close below prior weeks low for the first time after six weeks. The fall was associated with heavy volumes which suggest short term negativity. This indicates that short-term trend can remain in sell on rallies mode and test of $74.60 can be expected in coming week. On upside $80.50 will act as resistance.
On the other hand, MCX Crude Oil June Futures gave false break above the channel resistance in the third week of May and started to move lower sharply. This fall from Rs 4,977 to Rs 4,465 level has retraced the last leg of up move in faster time for the first time since June 2017. This indicates that important top has been formed at Rs 4,977 level, which will not be taken out at least for next few weeks. This has turned short term trend on downside with important resistance at Rs 4,750 level. In coming week we can expect prices to move further lower towards Rs 4,300 levels where 100 days EMA is placed. From last few days volumes are constantly staying above 10,000 lots along with the down move. This indicates weak sign over short-term.
International and domestic nickel prices rose this week supported by firm stainless steel prices in China. Additionally, demand for Nickel in the electric vehicle sectors has also been supporting the metal.
Domestically, prices have been tracking gains in Chinese prices. The market was being driven by consumers looking to store the metal in anticipation of a rise in prices.
Domestic cues like stockists' buying amid fresh demand from alloy industries also supported prices this week.
Nickel prices also found support from other base metal aluminium, which had risen to record levels in the domestic markets after sanctions imposed by the US on Russian President Vladimir Putins allies, including Russian oligarchs and companies controlled by them as well as government officials.
Fundamentally, the International Nickel Study Group, which showed that global nickel market deficit widened to 15,700 million tones (MT) in March, from a revised deficit of 6,600 MT in the previous month. During the first three months of 2018, the deficit widened to 39,100 MT from the earlier 27,100 MT.
Strong demand from both the stainless steel and electric vehicle (EV) markets coupled with continued supply deficits is projected to support robust prices for the base metal over the next few weeks.
Technically, on the domestic side the MCX Nickel Futures has continued to outperform the other peers and prices are trading near the high of last five weeks. The 20-week EMA has been providing important support to the upmove. So as long as this EMA is intact on downside trend will remain on upside. One can use any dips towards Rs 1,010 as buying opportunity and then move towards Rs 1,055-1,060 levels can be expected.
Internationally the LME Nickel Futures is in an uptrend since July 2017 and now prices are reaching close to the spike high made of Rs 16,690 levels. The overall trend remains positive as 10-week EMA is providing good support to the prices. The Rs 14,600 is the important support and we can expect it to move towards Rs 16,000 levels in the coming weeks.
Soybean prices crashed this week on the back of bullish weather report from the Indian Metrological Department.
The Met is forecasting a normal monsoon in Madhya Pradesh and Maharashtra, which are chief producers of the crop. This would prompt farmers to plant more after the government has increased the MSP by Rs 300 per quintal to Rs 3,325, which could witness increased soybean cultivation this year.
The Soybean Processors Association of India predicted 14 per cent increase in soyabean cultivation area in the country.
Prices were also weighed by weak soya meal exports. According to Soyabean processors Association of India, India is likely to export 90,000 MT soy meal in April, down around 20 per cent from 1,11,800 MT a year ago, mainly due to less demand from major importers.
Domestic prices have also been tracking weak overseas prices in the US markets. CBOT soybean futures also slumped this week by 1.66 per cent amid fears that global trade tensions could curb export demand for US soy.
The United States said it would impose tariffs on aluminum and steel imports from Canada, Mexico and the European Union, reigniting fears of a global trade war. This could prompt China to impose import tariffs on the soy imports from the US.
The next few weeks will be crucial for the Indian soyabean prices. Weather could now be the driving factor of prices. If the southwest monsoons progresses normally, then sowing would increase in Maharashtra and MP. This could weigh on prices in the next week or so. Vice versa, situation would also be possible if the monsoon progress is slow.
Technically, NCDEX Soyabean Futures have been witnessing tremendous selling pressure from last two weeks and prices have cracked down from Rs 3,895 to Rs 3,550 level till now. On a weekly basis, reversal on downside has been witnessed from the downward trend line which is intact since 2014. In the last week prices have decisively given close below Rs 3,640 level, which indicates short-term trend has now changed to sell on rallies now. We can expect further down move towards Rs 3,350 level in coming weeks.
Domestic and international cotton prices surged this week by over 4 per cent.
ICE cotton futures rose on the back of weather-related worries in the cotton-growing regions of the United States.
The southeast part of US has had just exceptional amounts of rain in the past few days after tropical storm Alberto dumped inches of rain on key growing areas in the US and has become a huge problem for the cotton market.
Prices were also supported after reports suggested that China may increase its imports of US cotton as it has reduced its state reserves over the past few years.
Meanwhile, fundamentally, the upside has also been supported by a marginally bullish US Department of Agriculture (USDA) report. The report told markets that the US projections for 2018-2019 included lower production, unchanged exports, and slightly higher ending stocks compared with 2017-2018. While the USDA increased 2017-2018 global output and consumption by 300,000 bales from the April report, inventories were unchanged.
Domestic cotton also surged higher by over 4.5 per cent this week following abnormal weather conditions in major cotton-producing countries such as the US and China has in turn improved India's prospects for cotton exports.
Indian exports are estimated to reach 7.5 million bales, highest after 2013-14. Exporters margins have also increased to a record high. Monthly cotton yarn exports in March were a record high at 158 million kg, the highest since December 2016.
Prices have also sound support from the heavy rainfall in the cotton-growing regions in China two weeks ago, and the country's depleting reserves, which is currently one-fifth of what it was three years ago.
However, prices upside could be limited as the next season could start late, around the middle of October, as early sowing may not happen this season. Usually around 10 per cent of cotton seeds are sown before the rains starts. However, to avoid pink bollworm risk, the government has advised farmers not to opt for early sowing. This will extend the lean supply season period. This in turn could limit upside.
However, again weather will be key this year and a normal monsoon could prompt farmers to increase sowing this year.
In the domestic market, technically, Cotton has finally showed spectacular rise in current week as prices rose from Rs 21,060 to Rs 22,250 levels. This is the level which we are witnessing for the first time since March 2017. It has given breakout above the consolidation of last 16 weeks. Such breakout can result into more upside for Cotton in coming weeks. The Rs 21,300 level will act as important support now. One should use buy on dips strategy and thus any dips towards Rs 21,700 can be used as buying opportunity for a target towards Rs 22,900 or higher levels. As compared to last week open interest has increased drastically from Rs 1,488 to Rs 7,613 level, which suggests bullish sign. However volumes are still below average of Rs 5,000, which should start to rise now in the coming week as strong rise can result into more participation.
In the international side, the US Cotton Futures have also moved higher in the last three weeks prices from $83.40 to $96.38 till now. The upside momentum has been strong till now which suggests further rise can be possible. One should use any pullback towards $90 as buying opportunity and on upside prices have potential to touch $100 levels.
(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)