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Crude prices may remain choppy over demand concerns: Kotak Securities

August 01
17:04 2020

Ravindra Rao

Comex gold was trading above $ 1955/oz on July 31 after a 0.6 percent decline the previous day. In the domestic market, MCX August gold contract had hit a high of Rs 53,429 per 10 gram, the highest level for a first-month contract but ended moderately lower. The August contract moved to a sharp premium to October contract as market players squared up position ahead of expiry.

In the international market, gold traded higher supported by persisting weakness in the US dollar. The dollar index traded near May 2018 lows amid increasing concerns about the health of the US economy amid rising virus cases, uneven economic recovery and wrangling over additional stimulus measures. Safe-haven buying amid rising virus cases and increased tensions between the US and China also supported the price.

However, better than expected Chinese manufacturing and Japan’s industrial production data However weighing on the price. ETF investors have also moved to sidelines, highlighting nervousness about further gains. Gold holdings with SPDR ETF remained unchanged on July 30 at 1241.955 tonne, after a brief outflow a day earlier.

Adding to concerns about demand, the World Gold Council said India’s gold demand for 2020 is expected to fall to its lowest in 26 years, with domestic bullion prices hitting a record high and a fall in disposable income.

Gold rebounded after a brief correction, which shows that the underlying momentum is still on the upside. Persistent weakness in the dollar index is supporting gold. However, with no fresh triggers and position squaring near weekend and month-end some choppiness is likely.

After a sharp 3.3 percent decline the previous day, NYMEX crude was trading moderately higher at above $ 40 per barrel on July 31. After days of rang-bound movement, crude came under pressure as part of sell-off across commodities amid increasing concerns about virus outbreak and health of US economy and position squaring around the key events for the week which was Fed decision and USGDP.

The Fed said it was willing to take all possible measures to support the economy. The US GDP data showed a record contraction in Q2, however, the reading was better than expected.

However, price is being supported by persistent weakness in the dollar index, which is holding near May 2018 lows, and Chinese manufacturing and Japan’s industrial production data.

While demand outlook has been muddled by persisting virus concerns, supply is expected to improve with OPEC set to reduce the pace of production cuts from August. Iraq’s non-compliance with production cuts also highlights the possibility of higher supply.

As per Reuters report, Iraq’s crude-oil exports averaged 2.75 million barrels per day in July, up 50,000 barrels from June.

US weekly inventory report was also mixed as it noted a sharp decline in crude oil stocks, however, stocks at Cushing, the delivery terminal for NYMEX crude futures, rose for the fourth consecutive week and stand were at the highest level since May.

Amid signs of increasing glut, the spread between near and farther month contract is widening. Despite yesterday’s correction, crude continues to trade in a broad range near $ 40 amid mixed factors as virus situation is assessed. We may see choppy trade continuing but general bias may be on the downside amid increasing demand concerns and prospects of higher supply.

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

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