There is still lot of uncertainty due to lack of detail on production quotas for individual producers
Anand Rathi Commodities
All non-agro commodities entered December with reasonable gains except natural gas. The yellow metal shot up sharply and climbed to a near one-month high as the dollar weakened after the United States and China agreed during the G20 summit on December 1-2 in Argentina to a temporary truce in their trade war.
However, gains in the yellow metal were capped as Federal Reserve Bank of New York President John Williams expressed no concern regarding market participants dialling back expectations for tightening in 2019. Silver was the top gainer of the week with more than 5 percent gains as it followed the trend of precious and industrial metals.
Last week, the much anticipated Organisation of Petroleum Exporting Countries (OPEC) meet took place in Vienna but it was a fractured verdict as Russia held back. Reports suggest that Russia did not want to reduce oil production by more than 150,000 barrels per day, which is less than what Saudi Arabia has demanded. Hence, crude oil prices shed all gains in one session only. But later in the week oil prices rallied after OPEC and Russia reached a deal to cut production by 1.2 million bpd.
Under the deal, the OPEC will cut production by 800,000 bpd and non-OPEC members led by Russia will cut output by 400,000 bpd. OPEC and non-OPEC nations will use October production levels as a baseline for cuts, which will be effective from January 2019 for the next six months. Iran was exempted from the output cut as it is under sanctions by the US. Libya and Venezuela too were granted an exemption.
But there is still lot of uncertainty due to lack of detail on production quotas for individual producers. Focus would now shift to the latest monthly reports of OPEC and non-OPEC nations. Hence, crude oil prices may continue to remain quite volatile.
Base metals have rallied after the US and China agreed to a truce in a trade dispute that has undermined confidence in their economic growth prospects. But gains were contained after Canada arrested Huawei Technologies CFO at the request of the US due to violation of US trade sanctions against Iran. This led to a fear that the trade truce between US and China may not last long.
This week will be crucial as political risk loom over commodity markets. UK has to get the Brexit Bill passed in its own parliament before going to the European Union and there is heightened amount of uncertainty regarding the same. Hence, currencies will be very volatile. Amid the political risk, safe haven buying may emerge in the yellow metal.
US nonfarm payrolls data declined sharply. Hence, the Federal Reserve may go slow in hiking interest rates. According to World Gold Council's latest monthly report, gold backed exchange traded funds have experienced positive flows, though marginally. Amid political uncertainty and rising investment demand, we expect the yellow metal to outperform.
Lastly, base metals may not stay positive even though US and China has decided to call for a 90-days trade truce as there is growing cloud of doubts regarding their constructive talks. Moreover, the arrest of Huawei Technologies CFO has threatened further escalation in tensions with the US.
But the downside in industrial metals may be limited as next week China fixed asset investments, retail sales and industrial production data is expected to come in strong. So, we expect the first half of December to be as choppy as before.
The author is Head – Commodity Research and Advisory at Anand Rathi CommoditiesDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.