Oversupply worries mount for oil; G20 summit a key trigger for gold
By Pritam Kumar Patnaik
International oil prices tumbled this week because of concerns that an economic slowdown may curb fuel demand growth, which overshadowed the reintroduction of sanctions on Iran. Expectations of an economic slowdown in coming months outweighed supply-side risks to crude markets from the US sanctions, which started on Monday.
On the supply side, oil is in ample availability despite the sanctions against Iran. Washington has granted 180-day exemptions to eight importers – China, India, South Korea, Japan, Italy, Greece, Taiwan and Turkey. These also happen to be Iran's biggest buyers, implying Iran will be allowed to continue to export oil for now, although lower than normal. Industry estimates suggested that Iran's oil exports have fallen 40-60 per cent since the imposition of the sanctions.
At the same time, output from the world's top three producers — Russia, the US and Saudi Arabia — has been rising. Output from these three countries in October exceeded 33 million barrels per day (bpd) for the first time, meaning they alone could meet more than a third of global crude oil consumption requirements.
Meanwhile, the US Energy Information Administration (EIA) said domestic crude inventories rose 5.8 million barrels in the latest week, more than double of analyst's expectations. Crude output also hit 11.6 million bpd, a weekly record, though weekly figures can be volatile. Most recent monthly data for August showed overall production at more than 11.3 million bpd. Additionally, the US Energy Information Administration said this week it expects output to top 12 million bpd by the middle of 2019, thanks to shale oil.
On the demand front, China's crude imports rose to 9.61 million barrels per day (bpd) in October, up 32 percent from a year earlier. According to a Reuters report, China will still be allowed to import some Iranian crude under the waiver to US sanctions that will enable it to purchase 3,60,000 bpd for 180 days.
In a separate development, Saudi Arabia's top government-funded think-tank is studying the possible effects on oil markets of a break-up of OPEC, the Wall Street Journal reported. The research project does not reflect an active debate inside the government over whether to leave the Organization of the Petroleum Exporting Countries in the near term, the Journal reported.
CFTC data showed that hedge funds and other money managers cut their net long US crude futures and options positions in the latest week to a fresh one-year low. The speculator group cut its combined futures and options position in New York and London by 2,142 contracts to 214,590 during the week to October 30.
Domestically, oil prices tracked international crude and fell over 3.5 per cent this week. A stable rupee also kept a lid on the prices.
Looking ahead, oil prices could continue its weakness over the next few days as theres a trifecta type of situation created by US stockpile builds, OPEC overproduction and the watering down of Iran sanctions. However, prices could find some support in the short run amid rumours that a return to oil production cuts by OPEC and its allies next year cannot be ruled out to avert a possible supply glut that could weigh on prices.
Technically, MCX Crude November futures continued to move lower for the fifth consecutive week. On a weekly basis, prices have moved lower from Rs 4,684 level to Rs 4,404 level, a loss of 5.97 per cent. On daily chart, the trend is intact in downward moving channel and now prices are reaching close towards the channel support. Support is placed at Rs 4,370-4,350 level. RSI is moving at oversold level of 25 and hence, the market needs to take some halt near the current levels to relieve the oversold state.
In short, crude is reaching towards the crucial support zone, which is placed at Rs 4,370-4,350 levels. On the upside, a close above Rs 4,490 will be the positive sign towards Rs 4,650 levels.
Gold and silver prices have corrected this week on the back of a strong dollar.
Bullions prices moved according to the two major economic events this week — the US mid-term elections and the US Fed meet. Gold and silver prices found support as the dollar slid initially after the US midterm elections delivered a split Congress.
Democrats won control of the US House of Representatives, giving them the opportunity to block President Donald Trump's push for a further round of tax cuts and deregulation measures that have boosted the US economy, stock markets and the dollar, and kept the Fed on a policy-tightening path.
However, after the initial weakness, the dollar made a comeback from the low of the week and traded higher after the Federal Reserve held interest rates steady. However, the statement from the Fed suggested that interest rates could be hiked further in December.
The currency markets took the statement as a hawkish one. According to the CME group's FedWatch tool, the likelihood of the Fed raising rates by another 25 basis points in December is 75 per cent.
Meanwhile, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell for the third straight session to 756.70 mt (million tonnes). Additionally, hedge funds and money managers raised their net short positions in Comex gold and silver contracts in the week for October 30, the US Commodity Futures Trading Commission said.
Domestic bullion prices tracked international prices and fell this week. A stable rupee also kept a cap on the prices.
Looking ahead, prices could continue to weaken further on a firmer dollar as the US Federal Reserve indicated that it will continue to raise interest rates, lowering demand for bullion.
However, the next big trigger point for bullion will be the G-20 Summit at the end of the month, where both US and China could talk further on reaching a trade deal. If the deal is not reached, safe haven demand for the Greenback could increase and weigh on the bullion prices.
Additionally, the Italian budget deadline is due next week. The Italian government insisted that it is sticking with its plan to rapidly increase public spending as a dispute with the European Union over the budget intensified following a gloomy set of forecasts.
Domestically, if the dollar remains strong, the rupee could witness some depreciation, which could in turn support domestic bullion prices. Technically, MCX Gold December Futures has continued to move under pressure from last two weeks. In recent weeks, prices have moved lower from Rs 31,876 to Rs 31,212 levels, a loss of 2.08 per cent.
Any close below Rs 31,200 will be further negative sign for gold towards Rs 30,900 levels. The 10-day EMA has crossed below the 20-day EMA for the first time since August 2018.
This suggests that trend is reversing on downside. On the upside, Rs 31,700 is the important resistance.