Focus will be on US crude production and refining demand. Production has been falling but at a slow pace. For the day, price may trade higher ahead of inventory report.
COMEX gold trades moderately lower near USD 1730/oz after a 0.9 percent decline yesterday. Gold rebounded after taking support near USD 1680/oz , however after a brief consolidation near USD 1750/oz it has again corrected.
We may see price remaining in a range above USD 1700/oz as market players await more clarity on US-China tensions. Gold price came under pressure amid persistent strength in US and global equity markets as market players downplayed increased US-China tensions, civil protests in US, mixed economic data from major economies and increasing virus cases worldwide and focused more on hopes of economic recovery with lifting of virus related restrictions and stimulus measures taken by central banks and governments.
While firmness in equity market has reduced appeal for safe haven assets like gold, the metal continues to hold above $1700/oz supported by slow economic recovery and threats from increased US-China tensions. Lack of any severe retaliation by US against China has eased market nerves however continuing tensions may keep concerns about the partial trade deal signed in January.
Also supporting price is robust investor interest as is evident from continuing ETF inflows. Gold holdings with SPDR ETF rose by 0.87 ton to 1129.28 tonnes, highest since April 2013. Gold may continue to trade in a broad range above USD 1700/oz but one may consider buying at lower levels as global growth worries and US-China tensions may keep a floor to prices.
Crude oil has risen over 2 percent to trade above USD 37.5/bbl after a 3.9 percent gain in previous session. Crude hit a high of USD 37.88/bbl today, the highest level since March 6. Crude oil surged to near 3-month high supported by API weekly report. API noted a 0.483 million barrels decline in US crude oil stocks as against market expectations of a near 3 million barrel increase.
Stock at Cushing, the delivery terminal for NYMEX crude futures, fell further by 2.2 million barrels indicating easing glut in the region. API however noted a bigger than expected increase in gasoline and distillate stocks. Crude oil has risen also in anticipation that OPEC and allies may decide on extending current deep production cuts. OPEC and allies next meeting is scheduled for June 9-10 however there are discussions to prepone the meeting to June 4 but no official announcement has been made so far.
OPEC’s current deal calls for 9.7 million barrels per day production cut in May and June and reduced production cut of about 7.7 million barrels per day for rest of the year. OPEC members are now discussing possibility of extending the current cuts for next few months. Reuters reports noted that the group may extend cuts of 9.7 million barrels per day into July or August. Higher global stocks and slow recovery in demand makes a case for OPEC to extend cuts however stability in prices and reopening of economies gives some room to act.
Crude oil has also benefitted from storm activity in Atlantic as a third named storm formed near southern Gulf of Mexico. Crude oil and other commodities have also benefitted from sustained strength in equity markets on optimism that lifting of virus restrictions and stimulus measures may boost economic recovery.
US crude oil has rallied sharply in last few days and it is likely that market players may hold on to the gains ahead of OPEC meeting. However, we recommend some caution as inventory report may not have much to offer. API report has already fueled expectations of a decline in US crude stocks. Apart from stocks, focus will be on US crude production and refining demand. Production has been falling but at a slow pace. For the day, price may trade higher ahead of inventory report.
NYMEX natural gas trades marginally higher near USD 1.78/mmBtu after a 0.2 percent gain yesterday. Natural gas has been trading in a narrow range amid mixed factors. Mild weather in US and weak LNG demand has kept pressure on price. Also weighing on price is expectations of another bigger than average rise in gas stocks.
However, supporting price is lower US gas production, drop in rig count to record low level, firmness in crude oil price and increased storm activity in the Atlantic. While hurricane season has just started, there have already been three named storms.
Currently, tropical storm Cristobal has formed in the southern Gulf of Mexico Also supporting price is expectations of pickup in demand as US and other countries work on reopening their economies. Natural gas may continue to trade in a range amid mixed factors however we expect buying to emerge at lower levels amid expectations of improvement demand and some risk premium due to storm activity.
Focus will continue to be on US weather, storm activity in Atlantic and trend in energy prices.The author is VP- Head Commodity Research at Kotak Securities