Oil upside looks limited, but US-China thaw a good sign
By Pritam Kumar Patnaik
Brent and NYMEX crude remained weak this week and were unable to find support despite OPEC announcing a supply cut of 1.2 million barrels per day (bpd) from January.
OPEC and some non-OPEC producers, including heavyweight Russia, announced they would cut oil supply by 1.2 million bpd, with an 800,000 bpd reduction planned by OPEC-members and 400,000 bpd by countries not affiliated with the group.
However, the move only briefly helped the oil prices move higher.
Prices remained weak during the week pressured by weakness in global stock markets and doubts that planned supply cuts led by producer club OPEC will be enough to rein in oversupply.
Adding pressure to the market was Russia's slower-than-expected planned cuts in production as part of an OPEC-led deal. Russia said it planned to cut oil output by just 50,000-60,000 bpd in January as it gradually builds to an agreed cut of 2,20,000 bpd.
Adding to bearish sentiment is speculators cutting their net long positions by 25,619 contracts to 1,44,775 in the week to December 4.
Some respite for oil was observed amid disruptions to Libyan oil exports from the country's biggest oil field, El Sharara.
Additionally, downside was limited after International Energy Agency (IEA) said the global oil market could move into deficit sooner than expected, thanks to OPEC's output agreement with Russia and Canada's decision to cut supply.
IEA kept its 2019 forecast for global oil demand growth at 1.4 million barrels per day, unchanged from its projection last month, and said it expected growth of 1.3 million bpd this year.
Supply-wise, US crude inventories at Cushing, Oklahoma, the delivery point for US crude futures, fell by nearly 822,000 barrels in the week through December 4.
Domestic crude remained weak despite the domestic currency weakening against the US dollar.
Looking ahead, the demand and supply projections for next year will be key driver for prices in the next few weeks.
For 2019, IEA demand growth outlook remains at 1.4 million bpd even though oil prices have fallen back considerably since the early October peak. However, OPEC said demand for its crude in 2019 would fall to 31.44 million bpd, 100,000 bpd less than predicted last month and 1.53 million bpd below what it currently produces.
Because of falling demand and rising supplies in the US, price upside move could be limited.
Additionally, oil prices could also track the uncertainty over the global economy stemming from US-China trade tensions, which could undermine oil consumption next year as growth in supply gathers pace.
Some of the support provided by lower prices will be offset by weaker economic growth globally — particularly in some emerging economies.
Brent crude oil prices could remain in the range from $58-63 per barrel and WTI crude prices could remain in the range of $49-54.
Technically, Crude January contract had range bound week with high made at Rs 3,845 levels and low at Rs 3,658 levels.
In prior week, there was a formation of Bullish candlestick pattern. However, there was no follow-up action in recent weeks. This suggests that consolidation in a broader range is ongoing post forming a short term low at Rs 3,499 level.
On the daily chart, prices are testing the channel resistance along with 15 days of exponential moving average. Internationally, Brent Crude futures have been moving in a range from last few days after the sharp fall.
Such action indicates continuation pattern and thus, a break below $58 will resume the medium term downtrend towards $50 levels.
On the upside, $63.70 is the crucial resistance. For MCX Crude, Rs 3,895 is the resistance. Any break below Rs 3,600 will resume downtrend towards Rs 3,250-3,200 levels.
Bullion prices ended mixed this week, with gold ending with small losses and silver with small gains.
Gold prices were weighed down by a firm dollar.
The yellow metal started on a firm note as a slide in global shares pushed investors to seek shelter in bullion while waning expectations of US interest rate hikes next year also supported the metal's appeal.
Losses in global stock markets snowballed on Monday on worries over slowing growth and fears that a rise in US-China tensions could torpedo chances of a trade deal.
The dollar earlier in the week remained lower on expectations that the US Federal Reserve may slow its interest rate hike trajectory next year. Fed funds futures pricing has been reducing the market expectations for hikes over the next 18 months.
According to CME FedWatch tool, only 3.4 per cent of the market believes that the Fed will hike rates by December 19, 2019.
Adding to positive sentiment are data from CFTC which showed that hedge funds and money managers trimmed their net short positions in Comex gold contracts in the week to December 04. Data revealed that speculators trimmed their net shorts by 50,289 to 1,539 contracts.
Additionally, holdings in SPDR Gold Trust ETF rose 0.50 per cent to 763.56 mt this week.
However, investors booked some profits ahead of the highly anticipated Fed meeting next.
The US Federal Reserve is widely expected to raise interest rates at its December 18-19 meeting, but the focus is on how many rate hikes will follow in 2019. Expectations of fewer interest rate rises is positive for gold as lower interest rates reduce the opportunity cost of holding non-yielding bullion.
Domestically, gold ended lower despite the domestic currency weakening against the US dollar.
Looking ahead, along with the Fed meeting, investors will keep an eye out for developments around Sino-US trade talks, and Brexit after lawmakers in Prime Minister Theresa May's Conservative party gathered enough support to trigger a no-confidence vote in her leadership.
With the US-China talks appearing to be going well, this could put the dollar under pressure in coming months and support gold. However, the deadline to reach any agreement will be March 1,, 2019.
So, LBMA Spot gold prices could remain in the range from $1,235-1,265 per ounce and LBMA spot silver prices could remain in the range from $14.21-14.90 per ounce.
Technically, gold February contract had a volatile week in which prices first moved higher towards Rs 32,118 levels and then reversed on downside towards Rs 31,500 levels.
This has formed a Shooting Star candlestick pattern on the weekly chart, which suggests that prices failed to sustain at higher levels. This is a negative sign over the short term.
Internationally, LBMA Gold Spot has been moving in a range after touching the high of $1,250 levels. On the other side, Indian rupee is in an appreciative trend over the short term, which can keep gold prices under pressure.
MCX Gold has broken five days of exponential moving average recently, which suggests bearishness. One can expect gold to trade with negative bias with Rs 31,900 as resistance on upside whereas on downside, important support is placed at Rs 31,200 levels.
(The writer is Head, Reliance Commodities)