'Global growth worries, US-China tensions likely to keep crude prices choppy'

We may see choppy trade however general bias may be on the downside on global growth worries and US-China tensions.

Ravindra Rao

Comex gold was trading marginally higher near $1,715 an ounce on May 29 after a 0.2 percent gain a day earlier.

Gold has witnessed a sharp rebound after taking support near 1,680. It has benefitted from increased US-China tensions, additional stimulus measures by governments and concerns about the health of major economies.

The US and China tensions have intensified in the last few days over China’s security law for Hong Kong. The law has been approved by China’s parliament and market players are awaiting US response.

A widening rift threatens the fragile trade deal reached in January and adds to global economic risks. Global economies are already under pressure due to the virus outbreak.

US economic data release on May 28 was largely negative. Q2 GDP estimate was revised downward from -4.8 percent to -5 percent, jobless claims fell less than expectations while pending home sales fell more than forecast. Durable goods orders data was however better than expectations.

ETF inflows also show robust investor interest.

Gold holdings with SPDR ETF rose by 0.58 tonne to 1,119.63 tonne, highest since April 2013. However, weighing on price is expectations of a pickup in economic activity as countries ease restrictions while stimulus measures support recovery.

Weak consumer demand, as evident from latest import numbers from China, is also weighing on the price.

Gold may continue to witness choppy trade as support from US-China tensions is countered by hopes of global economic recovery. General bias, however, maybe on the upside unless equity markets resume their upside momentum.

There was choppy trade in base metals on LME, after most ended on a higher note the day before. The metals pack has been alternating between gains and losses through the week amid mixed cues on both macro and fundamental front.

For the day, prices may come under pressure amid global risk aversion, tracking escalating tensions between US-China along ahead of President’s Donald Trump’s address, which could further deteriorate ties.

On the fundamental front, aluminium prices may come under pressure amid rising stocks at LME warehouses along, with signs of ample supplies in the physical market. However, falling stocks at SHFE may cap the downside.

In other metals, copper and zinc may come under pressure amid expectation of improving supply, especially from Peru.

According to Bloomberg, operations at the Antamina copper and zinc mine in Peru have resumed with a reduced workforce. The mine will restart at roughly 80 percent capacity and is expected to ramp up to full production in the third quarter, Teck Resources said.

However, falling stocks at SHFE and jump in cancel warrants stocks at LME in case of copper and signs of tightness in case of zinc as is evident from backwardation between

LME cash to three-month spread may cap the downside. Nickel may come under pressure amid higher stocks at LME and expectation of improving supply from the Philippines. However, lower stocks at SHFE may cap the downside.

Lastly, lead prices may continue to be pressurised by rising stocks at both LME and SHFE warehouses along with a bleak demand prospects from auto sector.

NYMEX crude slipped more than 1 percent to trade near $33 per barrel after a 2.7 percent gain on May 28.

Crude fell to $ 31.14 in the intraday trade but bounced back to end higher. Crude oil weakened on May 29 anticipating a disappointing inventory report but recovered as the report was mixed.

US EIA noted a 7.928 million barrels increase in crude oil stocks as against forecast of a 1.9 mn bbl decline, however, the build was less than the 8.7 mn bbl rise reported by API.

Stocks at Cushing, the delivery terminal for NYMEX crude futures, fell by 3.395 mn bbl, indicating easing glut. EIA also noted an eight-weekly decline in US crude production which now stands at 11.4 million barrels per day, lowest since July 2019.

EIA also noted an unexpected decline in gasoline stocks and a further increase in refining activity. Crude witnessed mixed trade also, as market players assessed a possibility of additional measures at the upcoming meeting of OPEC and allies on June 10.

As per a Reuters report, Saudi Arabia and other OPEC producers are considering an extension of record output cuts to the end of 2020 but have yet to win support from Russia.

Crude fell sharply after testing over two-month high, however, prices managed to hold above $31. We may see a choppy trade. General bias may be on the downside on global growth worries and US-China tensions. Focus will be on the US economic data, development on US-China ties and the US weekly rig activity report.

The author is VP- Head Commodity Research at Kotak Securities

Disclaimer: The views and investment tips expressed by experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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