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Crude oil: Crude may cool off some bit; gold looking up, but has limited upside

By Pritam Kumar Patnaik

The commodities markets kept investors glued to it during the week gone by with crude oil swinging to the news reports coming out of the US, Iran and Saudi Arabia while all eyes were on the precious metals amid strong volatility in equity and currency markets.

This week, we tried to capture the emerging trends in these commodities.

Crude oil

The global crude market witnessed yet another volatile week. The week saw oil prices tumble on the back of higher inventories and weakness in the US equity market. The week started on a weak note, after Washington indicated that it might grant waivers to sanctions on Iran’s oil exports and Saudi Arabia was said to be replacing any potential shortfall from Iran.

Additionally, the International Monetary Fund downgraded its global economic growth forecasts for 2018-19, potentially tempering demand for oil and its products. Trade tensions and rising import tariffs have started taking a toll on commerce, while emerging markets struggle with tighter financial conditions and capital outflows, the IMF said.

Oil prices were also impacted by weak US equities, which fell for 2 straight days. Rising US treasury yields and trade policy worries sparked the sell-off on Wall Street.

Meanwhile, weekly inventories showed that US crude inventories rose close to 6 million barrels last week, which was more than double of analyst’s expectations of a 2.6 million-barrels. Crude stocks at the Cushing, Oklahoma delivery hub rose by 2.4 million barrels, EIA said.

Looking ahead, prices could continue to remain volatile in the coming week. News from Iran will continue to dominate the market. According to Reuters, Iran’s crude exports fell further in the first week of October. The Islamic Republic exported 1.1 million barrels per day (bpd) of crude in that seven-day period. That’s down from at least 2.5 million bpd in April.

So prices continue to be supported by expectations of a shortage from Iran. However, this trend may continue only till November 04. November 4 is the day when the market will get clarity on the extent of sanctions on Iran. Additionally, the market could await cues from any fresh sanctions from the US.

We believe if the US does not impose fresh sanctions then some correction is due. However, more sanctions will continue to push prices higher towards the $100 level, which everyone in the world is talking about.

Domestically, prices could continue to track overseas prices and the rupee.

Two Indian companies have placed orders to buy Iranian oil in November; India, the world’s third-biggest oil importer, will buy 9 million barrels of Iranian oil in November, Reuters reported.

Technically, on the monthly chart, MCX Crude Oil is retreating from its four years high level and is also facing resistance at Rs 5,520 level which is 61.80% of Fibonacci Retracement of its Rs 7,784 level to Rs 1,805 level downturn.

On the daily chart, crude oil has given a breakdown of its “rising channel formation,” which suggests a further fall on the counter. In addition, on the hourly chart, crude oil is trading below its 21- as well as 50-hourly moving averages, which indicate a negative trend.

The MACD indicator on daily basis has given negative crossover with three bars down in histogram which confirms downward move in the counter. Based on above technical structure, the crude oil is expected to correct further. If it breaks its key support of Rs 5,200 level, then it will continue on the bearish momentum & a downside fall could see Rs 5,120 to Rs 5,050 levels in the coming session. However, if prices sustain above Rs 5,280, then an upside rally could test the Rs 5,350 and Rs 5,450 levels.

Bullion

Gold prices surged higher this week on the back of safe haven appeal, as US equities tumbled. Silver, on the other hand, remained weak, tracking weakness in base metal prices.

Gold started the week on a weak note as investors sought refuge in the dollar, which has been boosted by a run of strong U.S. economic data reinforcing expectations of further interest rate rises. US unemployment rate fell to a 49-year low, a government report showed last week the latest in a string of positive data that could prompt the Federal Reserve to maintain a path of gradual interest rate increases.

Additionally, the upside could be limited by waning demand due to depreciating domestic currencies in major gold-consuming countries such as India. Provisional data from precious metals consultancy GFMS showed that India’s gold imports in September month dropped more than 14 per cent from a year ago as a rally in local prices due to a depreciating rupee reduced demand in the world’s second-biggest consumer of bullion.

Additionally, jewellers were carrying ample inventory from August and retail demand was also weak and weighed on prices initially in the domestic markets.

However, after the initial weakness gold surged higher as share markets in Asia and US plunged to multi-month lows and the dollar weakened.

The dollar fell after US President Donald Trump criticised the Federal Reserve this week calling its interest rate increases a “ridiculous” policy that was making it more expensive for his administration to finance its growing deficits.

Looking ahead overseas prices could track the equity and the dollar in the week ahead. In India, demand could be key for prices. October imports could rise on the back of festive demand and could limit downside.

Additionally, rupee movement could impact prices. The Indian government is finalising a second list of items for import curbs and may announce it soon, a finance ministry official said, as New Delhi moved to reassure markets that it will take more steps, as needed, to stem the fall in Rupee and limit its widening current account deficit. So, further depreciation may be limited for the domestic currency.

Technically, on the weekly chart, MCX Gold has seen a breakout of the upper band of the symmetrical triangle formation and sustained above it with ample volume activity which suggests that the prices could accelerate its upside movement.

Moreover, gold is trading above its short-term & medium-term moving averages, which indicates a positive trend in the counter. In addition, MACD indicator on weekly and monthly basis has given positive crossover above the 0 line which shows a positive breath in the counter.

Based on above technical set up & indicator we are on Sideways to bullish move in MCX Gold towards Rs 32,300 level, where an immediate support comes at Rs 31,550 level.




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