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Crude likely to remain choppy; use lower levels as buying opportunity: Kotak Securities

May 26
15:04 2020

Ravindra Rao

Comex gold traded with little change near $ 1,735 per ounce after hitting a session low of $ 1,718. Gold has corrected after failing to test the key $ 1,800-level but has, so far, managed to hold above $ 17,00.

Weighing on prices is relative stability in equity markets as economies reopen. This is, however, countered by downbeat growth outlook, rising virus cases and increased US-China tensions.

Last week, China refrained from setting a GDP growth target for 2020, the first such move by the Asian giant comes amid uncertainty over the virus impact.

Also, weighing on prices is weaker consumer demand. China became a net exporter of gold via Hong Kong for the first time since at least 2011 in April, news agency Reuters has reported.

China’s gold imports via Hong Kong in April plunged 176 percent to -10.3 tonne versus the previous month.

However, supporting gold prices is global growth worries, hopes of additional stimulus measures, increasing virus cases worldwide, increasing US-China tensions and robust investor interest.

While countries are working on easing virus restrictions, global cases continue to rise and are now nearing 5.5 million mark, as per John Hopkins data.

Gold holdings with SPDR ETF rose by 4.38 tonne to 1116.708 tonne on May 22, indicating robust buying interest.

Gold is struggling to build on its upward momentum due to stable equity markets, however, we expect price to hold above $ 1,700 amid global growth worries and geopolitical issues, hence lower levels should be considered as a buying opportunity.

Base metals on LME traded sideways to higher early on May 26, as trading resumed after three day holiday. LME was closed on May 25 on account of the bank holiday.

On a positive note, lending support to the prices is upbeat risk appetite as is evident from gains in equity indices amid optimism over reopening of world’s third-largest economy along, with growing expectation of further stimulus by major economies to revive growth.

The gains may be capped amid escalating tensions between the US and China along with worries over the second wave of infections and deepening global recession.

The US-China relations continue to sour, with China condemning the US for adding 33 Chinese entities to a trade blacklist, but without announcing any retaliatory steps, as reported by Bloomberg.

Meanwhile, the recent spate of bleak data from major economies highlights the damage caused by the pandemic, fuelling global growth worries and denting demand outlook for the metals.

The metals pack may witness mixed trade amid mixed cues on both macro as well as the fundamental front. However, the overall bias for most metals for the day may be a positive tracking upbeat risk appetite.

NYMEX crude trades 2 percent higher near $ 34 per barrel after a 2 percent decline on May 22.

After a sharp rally in last few days, crude oil has turned choppy amid mixed factors. Supporting price is improving supply situation as US, OPEC and other producers cut output aggressively to counter the supply glut.

The US’ weekly crude production has fallen to July 2019 lows while the drop in rig count shows weaker production interest.

Drilling rigs targeting crude oil in the US fell by 21 to 237, that’s the tenth consecutive weekly drop and a 65 percent decline since March 13.

OPEC and allies are also adhering well with the 9.7 million barrels per day production cut deal. As per Reuters reports, Russia said its oil output nearly dropped to its target of 8.5 million barrels per day for May and June under its supply cut deal.

Russia’s energy ministry noted that a rise in demand should help cut the current global surplus of around 7- 12 million bpd by June or July.

Adding to expectations of recovery in demand, International Energy Agency has told Bloomberg News that the world hasn’t seen peak demand yet and that it expects that sooner or later, oil consumption will return to the pre-crisis levels and rise above that.

Demand expectations have picked up also as countries continue to ease virus related restrictions.

India partially resumed domestic flights services this week. However, weighing on prices are concerns about health of the US and global economies and the US-China feud, which can hit American crude exports.

Crude has rallied sharply in the last few days. However, the recent price movement shows some exhaustion. We expect choppy trade but lower levels should be considered as a buying opportunity as hopes of tighter market may continue to support price.

The author is VP- Head Commodity Research at Kotak Securities

Disclaimer: The views and investment tips expressed by experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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