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#39;Rise in US economic activity, decline in crude stocks to keep sentiment upbeat#39;

June 04
18:05 2020

Ravindra Rao

COMEX gold trades in a narrow range above $ 1,700/oz after a sharp 1.7% decline on June 3. Gold fell as low as $ 1,690.3/oz in intraday trade on June 3 but managed to give a close above $ 1,700/oz.

Gold corrected after failing to sustain above the $ 1,750/oz level. Price came under pressure as persistent strength in the US and global equity markets reduced its appeal as an alternative asset. Equity markets are on an up move amid expectations that lifting of virus related restrictions and government stimulus measures may revive economic activity.

Risk sentiment improved further yesterday as US economic data came in better than expectations adding to hopes of economic recovery. US ADP jobs report, ISM services index and factory orders data released yesterday was better than expectations. However, supporting gold price is weakness in US dollar.

The US dollar index has slumped to March lows amid reduced safe haven buying while euro has strengthened ahead of ECB meeting. Also supporting gold price is loose monetary policy stance of major central banks. Amid the latest, ECB, at its meeting today, is expected to boost its bond purchase program to support economic recovery.

While market players have downplayed US-China tensions due to lack of any severe retaliation by US or countermeasures by China, tensions persist and this may keep concerns high about the partial trade deal as well.

ETF inflows also show robust investor interest. Gold holdings with SPDR ETF rose by 4.09 tonnes to 1133.374 tonnes, highest since April 2013. Gold may remain under pressure until we see halt in the rally in equity markets however price may continue to hold near $ 1700/oz level amid global growth concerns and US-China tensions.

NYMEX crude has slipped more than 1% to trade near $ 36.5/bbl after a 1.3% gain yesterday. Crude hit a high of $ 38.18/bbl in intraday trade yesterday, the highest level since early March, however failure to sustain above $ 38/bbl led to some correction. Also weighing on crude price is uncertainty about OPEC production cut deal.

Crude rose in last few days amid expectations that OPEC and allies which are currently cutting output by 9.7 million barrels per day may extend the cuts for next few months. There were recommendations that OPEC and allies hold an early meeting on June 4 as against scheduled meeting for June 9-10. Concerns about OPEC’s production cut deal rose after Reuters quoted sources stating that Gulf OPEC producers Saudi Arabia, Kuwait and the United Arab Emirates have no plans to extend beyond June their voluntary additional oil cuts.

Meanwhile, Bloomberg reports noted that that Saudi Arabia and Russia are reluctant to extend output cuts without more compliance from the rest of the pact. While OPEC uncertainty has pressurized crude, supporting prices is EIA inventory report. EIA noted a 2.077 million barrels decline in US crude oil stocks as against market expectations of a 3 mn bbl increase and as against API’s 0.483 mn bbl decline.

US crude production fell for the ninth consecutive week to 11.2 million barrels per day, lowest since October 2018. EIA however noted a bigger than expected rise in gasoline and distillate stocks. Crude is also supported by increased storm activity which has caused producers to cut production and evacuate personnel. Also supporting crude price is some upbeat economic data from US which improves demand outlook.

US ADP jobs report, ISM services index and factory orders data released yesterday was better than expectations. Also supporting price is persistent strength in US equity market amid hopes that easing of virus related restrictions and government stimulus measures may help global economy recover. Crude oil has been on an up move for last few days but uncertainty about OPEC’s production cut deal has brought a halt to the momentum. However, price may benefit from decline in US crude stocks and general upbeat risk sentiment hence we maintain our buy on dips view for the commodity.

(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.

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