By Pritam Kumar Patnaik
Finally, there are some signs that the rally in crude oil prices may be coming to a halt. But it remains to be seen how the market responds when the oil sanctions on Iran take effect in just about two weeks from now.
The other commodity creating a lot of buzz is gold, which seems to have finally found some footing and is readying to rally after a long consolidation.
Heres what fundamentals and technical charts are telling us about the two commodities.
Crude oil finally heads south
Crude oil prices tumbled in international markets this week, amid concerns over the long-term demand outlook due to geopolitical tensions. Growing tensions over the disappearance of journalist Jamal Khashoggi at the Saudi consulate in Istanbul proved supportive for oil prices.
US President Donald Trump threatened severe punishment if it is found that Khashoggi was killed in the consulate. Additionally, the kingdom said it would retaliate to any action against it over the Khashoggi case, state news agency SPA reported, quoting an official source.
However, after the initial upside, oil prices tumbled after US crude oil inventories rose last week. Data showed that US crude stocks rose 6.5 million barrels last week, the fourth straight weekly build, as exports were down to 1.8 million barrels per day, the US Energy Information Administration said, in a report analyst characterised as bearish.
Inventories rose sharply even as US crude production slipped 300,000 bpd to 10.9 million bpd last week, which analysts attributed to the effects of offshore facilities closing temporarily for Hurricane Michael.
Fundamentally, oil markets look adequately supplied for now after a big production increase in the last six months, but the industry is coming under strain, the Wests energy watchdog said. The International Energy Agency said in its monthly report that the worlds spare oil production capacity was down to 2% of global demand, with further falls likely.
The Wall Street Journal reported that Opec was expecting oil prices to fall further in the coming weeks on rising crude oil production in the US. Forthcoming seasonal scale back in refinery demand could result in oil stock builds. The buildup amid the upward trend in US crude oil production, could be a bearish factor for oil prices in the coming few weeks.
However, investors worry Saudi Arabia could use oil supply to retaliate against critics. Such a move would roil markets, as Reuters reported that the Saudis have not used oil as a policy weapon since the oil embargo of the early 1970s, and the market is already anticipating reduced supply when sanctions on Iranian oil exports resume on November 04, 2018.
Technically, MCX crude on daily chart has seen a breakdown of its Rising Channel formation and has sustained below its 21-day moving average, which signifies downside pressure in the counter.
Momentum indicator RSI has seen a negative crossover and a breakdown of its rising trend line formation which indicates further weakness in the counter.
So based on above analysis, we are expecting sideways to downside movement in MCX crude prices once its breaks and sustains below Rs 5,040 level then a downside fall could be extending to Rs 4,900-4,850 levels. While a alternate situation can be seen if prices hold above Rs 5,050 level, where an upside rally could retrace up to Rs 5,120-5,300 levels.
Gold shows signs of looking up
Gold prices surged higher this week as investors sought refuge in the metal after mounting tensions between the US and Saudi Arabia compounded jitters in global stock markets.
Global stocks were under pressure this week, with European shares hitting 22-month lows early this week on the back of a host of factors including a US-China trade dispute, rising tensions between Saudi Arabia and western powers, stalled Brexit negotiations and concerns over an economic slowdown in China.
SPDR Gold Trust the worlds largest gold-backed exchange-traded fund, said its holdings rose to 748.765 MT this week from 744.64 MT last week. In terms of ounces, holdings rose to 24,073,355.22 ounces from 23,940,897.03.
Prices was also supported by news reports that some central banks have taken their holdings of gold to record levels in recent months in an effort to maintain the value of their currencies against a rising US dollar.
Reuters news reports revealed that Poland raised its gold holdings to the highest in at least 35 years. The country increased its holdings by 4.4 MT from August to about 117 MT in September, a record, according to news reports going back to January 1983.
Upside was limited after the US Dollar Index rose against the basket of currencies, after minutes from the Federal Reserves September meeting showed that Fed policy makers are largely united on the need to raise borrowing costs further.
Every Fed policymaker backed the central bank's September decision to raise the target policy rate to between 2% and 2.25%, according to minutes of the Sept. 25-26 meeting, despite the recent criticism from the US President.
Going forward, with growing concerns about the global economy on the back of trade tensions, there is potential for a bit of an upside in gold.
With Chinese equity markets continuing to drift lower, and lingering geopolitical risks such as Fed interest rate hikes, Italian budget concerns and the US-China trade war, stock markets are still shaky and have not stabilised.
Chinas economy grew 6.5 per cent in the third quarter from a year earlier, its weakest pace since the global financial crisis, and missed expectations as a years-long campaign to tackle debt risks and the trade war with the US has begun to take its toll on the economy.
However, geopolitical and macroeconomic factors are still not indicating exuberance and risk appetite returning to markets with full throttle.
Markets will also look to cues from the US dollar movements next week, along with the economic calendar next week. Technically, MCX Gold on the monthly chart has sustained above the Upper band of its “Symmetric Triangle” Breakout with ample volume activity which suggests that more demand is getting accentuated toward northward movement.
Moreover, it is trading above its all time frame Moving Averages and near Upper Band of Bollinger Band which indicates a positive trend in the counter. Momentum indicators RSI and MACD are trading higher with positive crossover, which suggests positive breath in the counter.
Based on above analysis, we are expecting good upside movement once its break a key resistance & sustains above Rs 32,150 level then an upside rally could be extending to Rs 32,500-33,000 level. While an alternate situation can be seen down towards Rs 31,360 and Rs 30,875 levels if the prices break a key support at Rs 31,700 level.
(Pritam Kumar Patnaik is Head of Reliance Commodities. Investors are advised to consult their financial planners before taking any investment decisions based on the observations made in this writeup)