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Last Updated : Jun 25, 2020 01:59 PM IST | Source: Moneycontrol.com

Crude likely to see extended losses; gold may remain choppy: Kotak Securities

With general weaker risk sentiment, we could see some extended losses in crude oil however a sustained decline is less likely. Focus may be on US economic data and development relating to virus outbreak.

Moneycontrol Contributor

Ravindra Rao

COMEX gold trades mixed near $1,770/oz after a 0.4 percent decline on June 24. Gold rose as high as $1,796.1/oz in intraday trade yesterday, the highest since 2011, however, failure to break past the $1,800/oz level led to some correction.

Gold came under pressure on gains in the US dollar which offset increased safe-haven buying and robust investor interest. IMF’s downbeat growth forecasts, rising virus cases especially in the US and increased US-EU trade tensions led to a sharp flight from risker assets to safe havens yesterday and this led to gains in US dollar index putting pressure on commodities at large.

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IMF expects the global economy to contract by 4.9 percent in 2020 as against its previous outlook of 3 percent decline. IMF was largely expected to lower growth estimates given the virus spread while its outlook is also better than the 6 percent and 5.2 percent decline projected by OECD and World Bank respectively.

The biggest concern for financial markets at present is the rising virus cases especially in countries like the US, China, etc. who had got some control over the situation. If the virus spread continues, countries may slow down the reopening process and may even be forced to take fresh measures and this could slow down economic recovery.

As per Reuters reports, three US states reported record increases in new cases on Wednesday - Florida, Oklahoma and South Carolina while the governors of New York, New Jersey and Connecticut ordered travellers from nine other US states to quarantine for 14 days on arrival.

Investors continued to put money into gold to safeguard them as is evident from the rise in ETF holdings. Gold holdings with SPDR ETF rose by 7.6 tonne to 1176.85 tonne, highest since April 2013. Gold may witness choppy trade amid struggle to break past the $1,800/oz level, however, the general bias may be on the upside until risk sentiment improves significantly.

NYMEX crude trades moderately below $38 per barrel after a sharp 5.8 percent decline in previous session. Crude oil surged to fresh March highs earlier this week but failed to hold above $41/bbl and has corrected sharply. Higher US supply and concerns about the recovery in demand have pressurized crude oil price.

Sell-off in the US equity market and gains in the US dollar also weighed on commodities at large. US EIA weekly inventory report was largely negative. EIA noted a 1.422 million barrels increase in US crude oil stocks as against forecast of 0.3 mn bbl rise and stocks now stand at a record high level of 540.7 million barrels. However, the stock buildup was less than that reported by API.

US crude production rose from 10.5 million barrels per day to 11 million bpd. Production rose last week after 11 consecutive weeks of decline however the recovery could be due to production coming back online in the Gulf of Mexico which was shut due to tropical storm Cristobal.

On the product side, EIA noted an unexpected increase in distillate stocks but also a bigger than expected decline in gasoline stocks. US equity market plunged 2.7 percent yesterday as rising virus cases in many countries and downbeat growth forecasts dented expectations of a quick recovery. IMF expects the global economy to contract by 4.9 percent in 2020 as against its previous outlook of 3 percent decline.

IMF outlook, however, is better than OECD’s forecast of a 6 percent slump this year and World Bank’s estimate of 5.2 percent contraction. Crude oil was struggling to build momentum above USD 40 per barrel and the sell-off in US equity market led to some correction.

With general weaker risk sentiment, we could see some extended losses in crude oil however a sustained decline is less likely. The focus may be on US economic data and development relating to the virus outbreak.

NYMEX natural gas trades weaker near USD 1.58/mmBtu after a 2.4 percent decline yesterday. Weighing on gas price is concerns about the health of the US economy as rising virus cases threaten the economic recovery. Also weighing on price is expectations of a bigger than average rise in gas stocks.

As per Bloomberg estimates, US EIA report due today is expected to note a 106 Bcf rise in US natural gas stocks as against a 5-year average increase of 73 Bcf for this time of the year. Also weighing on price is weaker export demand due to sluggish global economic activity. US production cuts and expectations of pickup in summer related cooling demand has however lent some support to prices.

Natural gas may remain under pressure today ahead of the inventory report however a bigger than average decline has been factored into some extent and we may see extended selling only if stocks build is more than market expectations. Apart from the inventory report, the focus will also be on US weather outlook and trend in energy prices.

The author is VP- Head Commodity Research at Kotak Securities

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jun 25, 2020 01:22 pm
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