By Kunal Shah
Last week, commodities broadly remained range-bound. More than any fundamentals pertaining to commodities, developments in the Euro zone were more responsible for the volatile commodities complex. Agricultural commodities on domestic bourses witnessed significant correction and commodities such as Guar seed, Guar gum and Jeera were amongst the top losers. Sharp depreciation in the INR also made things difficult for traders.
The fact is that due to higher inflation, emerging markets which have been growth engines for the global economy is showing signs of cooling off. Despite monetary tightening by emerging markets, inflation remains very high and weakness in the currencies of emerging markets also partly reflect the weakness of these economies. The Euro zone debt crisis continue to remain prime issue for the markets, despite interest rate cuts by the ECB credit markets in the Euro Zone continues to remain tight and the widening Euribor -OIS spread indicates the stress in the financial system in the Euro zone.
On the other hand we have seen a rally in Crude Oil futures on account of fear of geopolitical tension at Iran, drop in stockpiles in the US and signs of growth in the US, taking crude oil to the level of $98/barrel. The UN’s “International Atomic Energy Report”, has mentioned that Iran has been trying to develop capabilities to produce an atomic bomb small enough to put missiles capable of hitting Israel triggering a further upside in crude oil. Iran produces around 4.25 million barrels of Crude Oil production and any geopolitical tension will add fuel to the bullish sentiments in a tight supply scenario.
I feel, in such a fragile economic environment current price of crude oil is unsustainable. The International Energy Agency has reduced forecasts of global oil demand in 2012 for a third month on weaker prospects for developed nations and the OPEC still has spare capacity by 3.58 million barrels/ day over and above that IEA increased its estimates from non OPEC supply by stating that in the year 2012, output from Russia, Canada and Brazil will increase by 1.1 million barrels/ day.
Libya crude oil output recovered quicker than expected and in the last month it pumped almost 350000 barrels/ day. This production number is expected to move up significantly in the month of November and December. I expect this increased production from Libya to weigh on crude oil prices (especially on Brent Crude). On the Nymex, crude oil may find difficult to breach levels of $102/barrel on the downside it can again test levels of $92- $91/barrel in the coming week. I recommend traders to remain short in crude oil with a stoploss placed above $102/barrel on the Nymex for the next week.
