Crude oil likely to remain choppy; use dips as a buying opportunity: Kotak Securities

Ravindra Rao

Comex gold was trading marginally higher near $1,705/oz after gaining 1.3 percent on June 8. Gold rose amid some dip buying after the price closed above the key $1,680 level. Gold benefitted from weakness in the US dollar index as optimism about US economy was countered by reduced safe-haven buying.

Mixed data from major economies also highlighted uneven recovery, increasing gold’s safe-haven appeal.

The unexpected rise in US jobs in May fuelled hopes of a quick recovery but mixed data from China and Europe kept the concerns high. US-China tensions, protests in the US and continuing stimulus measures by central banks and governments supported gold.

Market players are now positioning for Federal Open Market Committee (FOMC) decision on June 10. The Fed is largely expected to keep monetary policy unchanged as stability in financial markets and pickup in economic activity gives it room to act. It may, however, maintain its stance of taking all possible measures to support the economy.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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However, weighing on gold price is weaker investor interest and continuing strength in equity markets.

The US and global markets are on a stronger footing amid expectations that lifting of restrictions and stimulus measures may quicken economic recovery.

Gold holdings with SPDR ETF fell by 2.63 tonnes to 1125.48 tonnes, the third consecutive decline. Strength in equity market reduced incentive to invest in gold.

We may see range-bound trade ahead of FOMC decision. However sell-on-rise is advisable unless we see a substantial correction in equity markets.

NYMEX crude has risen more than 1 percent to trade near $38.7 per barrel after a 3.4 percent decline on June 8. Crude oil hit a fresh three-month high of $ 40.44 per barrel in intraday trade but failed to sustain above the $40 resulting in some profit taking.

Price came under pressure as market players assessed OPEC’s production cut deal while rally above $40 fuelled concerns that US producers may bring some supply back on line.

OPEC’s deal in April called for 9.7 million barrels per day (bpd) cut in May and June followed by a reduced cut of 7.7 million bpd from July to December. In addition, Saudi Arabia, UAE and Kuwait committed to a voluntary cut of 1.18 million bpd in June.

After the meeting over the weekend, OPEC and allies agreed to extend the current 9.7 million bpd cut to July. Mexico has refrained from extending cuts, so actual reduction will be around 9.6 million bpd.

Saudi, Kuwait and UAE will not continue with the voluntary cuts. Also the one month extension shows that OPEC may not continue with cuts for long due to pick up in economic activity, Reuters said. OPEC’s deal is a positive move, however, it was largely anticipated while market players got cautious from one month extension and lack of voluntary cuts by Gulf producers.

Supporting the price is the expectation of another decline in the US crude oil stocks. Drop in the crude oil rig count to 2009 lows also shows weaker production interest.

Crude came under pressure also on easing supply concerns relating to Libya amid peace talks but concerns rose again as Libya's National Oil Corporation said on June 9 that an “armed force” entered the Sharara oilfield and told employees to shut the oilfield, Reuters reported.

Crude oil has witnessed sharp gains in the last few weeks but is struggling to hold momentum above $40 per barrel. Choppy trade may continue but any corrective dip can be seen as a buying opportunity amid improving demand outlook and tighter supplies.

NYMEX natural gas has risen more than a  percent to trade near USD 1.81/mmBtu after a 0.4% gain on June 8. Natural gas continues to trade in a broad range amid mixed cues.

Supporting the price is supply disruption caused by storm activity in the Atlantic, US natural gas rig count dropping to a record low and expectations of a pickup in demand amid optimism about US economy.

Tropical storm Christobal weakened after making a landfall in Louisiana and was moving inwards but some production in the Gulf of Mexico remains shut. As per US BSEE update, about 35.14 percent of the natural gas production in the Gulf of Mexico is shut.

However, weighing on gas price is mixed weather forecasts which indicate weaker cooling demand despite onset of summer. Also weighing on prices is expectations of another bigger than average rise in gas stocks that will add to already elevated stocks.

Natural gas may continue to trade in a broad range of $1.65-1.95/mmBtu amid lack of significant cues but general bias may be on the upside amid supply disruption and optimism about US economy.

(The author is VP- Head Commodity Research at Kotak Securities)

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