Mumbai: Energy, base metals and precious metals have all been performing well in terms of price appreciation in recent weeks. Whether the recovery is shallow or the market has bottomed out decisively is hard to tell at this point of time.
To be sure, economic data is not getting any worse. This by itself is encouraging. A series of stimulus packages are in place. Although their effect will be lagged, traders are quick to anticipate changes in market conditions in the future. No wonder, current prices reflect not only today’s market fundamentals but also expectation of changes in the future.
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Looking at individual commodity demand-supply fundamentals and data flows, there is little room for doubt that the crude market is set to tighten, resulting in upside price risks. Recent recovery in base metals may have been overdone which means prices could retreat to more reasonable levels.
Current demand-supply fundamentals do not admit of sustained uptrend in prices.
On the other hand, gold has enjoyed a wonderful upward trend in the first quarter because of its safe haven status and concerns over the financial market. The uptrend is set to continue as US dollar weakness and inflation expectations in the coming months are sure to propel the precious metal even higher.
It is clear the next few months - second quarter in particular - would be interesting. Economic data, expansion of liquidity, interest rates, equity market performance and inflation are all expected to create volatile conditions in the commodities complex. The appetite for risky assets may increase.
Investment in base metals, for instance, needs a strategy that is both tailored and flexible in exposure. The market collapsed too much too soon in the second half of 2008 on fears of economic recession. The current surge may not be sustainable; yet appropriate entry and exit strategies can bring handsome rewards. To be sure, some of the rallies are the result of short-covering.
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Gold
Prices have moved back and forth, but in a range, tempered by investor interest, risk appetite and opportunities in other markets such as equity. A sharp depreciation of the dollar has supported the market. However, on Friday, the dollar gained against the euro, which proved negative for the yellow metal.
In London the PM Fix for gold on Friday was $924.00 an ounce, down from 938.25/oz the previous day. Silver declined too from $13.66/oz on Thursday (AM Fix) to $13.22/oz on Friday.
Conditions for a gradual recovery in prices to breach the psychological $1,000/oz are developing over the medium-term. In the coming months, weakening of the US dollar and inflation expectations are sure to lure investors into the gold market, propelling prices higher. Investor interest is the key.
However, inflows into exchange traded products have been unsteady, though rising gradually. An uptrend in the equities market and slowdown in physical demand resulting from high prices may lead to profit-taking and price correction from time to time.
In the short-term the metal is likely to trade in a range of $880 and $950 an ounce. There will be support closer to $900 and resistance above $940.
Base metals
The complex displayed a mixed tendency on Friday after a fall in copper and zinc stocks, and an appreciation of the US dollar. For the week, copper was up 2.3 per cent and zinc up 7.0 per cent. Nickel and aluminium were down 2.9 per cent and lead down 5.4 per cent on the week.
Despite collapsing demand and rising surplus in the physical market for refined copper, copper prices have increased sharply in recent weeks. The key drivers of this rally have been the widely reported purchases by the Chinese State Reserve Bureau (SRB) and tightness in availability of scrap and secondary material in recent months.
For copper, the downside risk seems to be reasonably well defined. The aforesaid factors will provide a floor at $3,000 a tonne. According to technical analysts, copper looks bullish in range. There is large outstanding speculative short position, as highlighted by the CFTC commitment of Traders report, and the outlook for risky assets is turning increasingly positive. Near-term support is seen at $3,860, while bears need to break below $3,725 to warn of stalling. Further gains are likely in the next quarter
Looking at demand-supply and inventory levels, aluminium seems to be most at risk for a downside movement. The pace of output cuts has reportedly slowed. But upside risk following short-covering rallies is not ruled out.
Lead prices upsurge too appears to have been overdone, and with the market heading for a period of demand weakness, prices look vulnerable at the current levels. Zinc price rally too looks running out of steam. Weak stainless steel demand means nickel will be range bound.
Crude
Crude prices have decisively broken above $ 50 a barrel. Both front-end and back-end prices have moved up. There is indication the sentiment is changing from negative to positive. Flow of positive and encouraging economic data in the coming days will be necessary to sustain the sentiment.
No doubt, the demand side still looks weak; but things are not getting worse. Year-on-year fall in global demand is estimated at two million barrels a day for the first half of 2009. On the other hand, production cuts have largely neutralised the demand side weakness. While OPEC has cut output voluntarily, non-OPEC production is showing involuntary weakness. Over the coming months, there is likely to be further tightening of the oil balances as the crude oil inventory overhang erodes.
In Q2, crude oil may average $50 a barrel with a 10 per cent movement on either side, while Q3 the average has the potential to rise higher above $60 a barrel.
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According to reports, India’s domestic oil product sales grew at its slowest pace since October last year. Total crude oil imports fell almost four per cent year-on-year, despite the start of Reliances Jamnagar refinery. There is a belief, the weakness in demand may be shifting geographically from the US to Asia-Pacific, India has been relatively insulated from the steep global downturn. This is evident in a 15 per cent year-on-year increase in gasoline or petrol sales, and diesel which has been the weakest component of the barrel, also recorded a 4.6 percent year-on-year rise.
