Commodity Trends: Gold, oil, equities lent support

The clear winner among commodities in recent weeks is crude oil and on Friday it hit a seven-month high above $70 per barrel on Friday after much better-than-expected US employment data pushed stock markets higher. A government report said US employers cut 345,000 jobs last month, the fewest since September and far less than forecast, suggesting the economy’s severe weakness was diminishing. But profit booking send oil prices down to $68 levels.

Even though food items became dearer because of the base effect, the wholesale price index (WPI) measured annual inflation for the week ended May 23 dropped to 0.48%. Fruits, vegetables, pulses and cereals became costlier over the week, while fuel index and index for manufactured items remained unchanged. But agri-analysts suggest with normal monsoon in offing, inflation in food items is likely to remain soft.

Reversing its early weak trends, the Bombay Stock Exchange benchmark Sensex regained the 15,000 point level after nine months by rising nearly 138 points after the government unveiled its reforms plan to tackle the economic slowdown.

Precious Metals
Gold prices traded range bound in the last week. After witnessing rise in past few weeks prices failed to move higher on account of profit booking. But due to high investment demand and weakness in dollar prices had limited downside. Silver prices have witnessed relatively larger gains in recent times. Strong investment by ETFs is the prominent reason for this rise. It is expected that investment demand for silver in 2009 could comprise 20%- 25% of total demand in 2009, as compared to 7% in 2008. The holdings of the iShares Silver Trust ETF reached to 8,605.43 tonnes on June 3. Rise in oil prices have also played key role in supporting gold. Meanwhile dollar lost ground after ECB kept interest rates unchanged and ECB President said that Eurozone economy is expected to recover in the second half of this year.

The outlook for gold looks largely dependent on the path of the dollar over the coming months as a trillion-dollar-plus U.S. deficit and the impact of unorthodox monetary policy to boost lending, could stoke inflation greatly. Further, investors are worried about the imminent collapse of the dollar which would have severe ramifications across the board. Bullion's link to the dollar is a well-established one, with the metal traditionally used as a hedge against weakness in the U.S. currency. A softer dollar also makes dollar-priced gold cheaper for holders of other currencies. Longer-term inflation worries will continue to shape demand for gold.

The overall health of the global economy will stay in focus. Spot Gold can find crucial support in the zone of $960-948 levels, whereas major resistance zone is seen between $985 and $1000 MCX August Gold can face support around Rs.14730/14600 levels, whereas resistance is seen at Rs. 14975/15110 per 10 gram.

Crude Oil
Crude Oil prices extended its weekly gain for third week in a row, as weakening dollar and firm global equity markets boosted market sentiments. Oil prices reached to seven month high despite bearish inventory data, as better than expected economic data from US bolstered oil prices. Oil prices touched a high of $69.52 on Thursday. US Energy department said that, Crude Oil inventory for the week ended May 29 increased by 2.9Mbbl to 366Mbbl, against the expected decline of 1.5Mbbl.Distillates stocks also increased by 1.6Mbbl to 150Mbbl and gasoline stocks decreased by 0.2Mbbl to 203.2Mbbl. US weekly employment data showed that number of US workers filing for new claims for jobless benefits declined for third straight week. Market sentiment remained buoyant on hopes for economic recovery, which could help to revive ailing energy demand.

Meanwhile dollar continued to weaken against major currencies on reduction in demand for safer currencies, helping oil prices to move higher. Economic data is also showing improvement, leading to rise in expectation of economic recovery during the second half of this year. We believe that rise in oil prices is not backed by demand fundamentals as demand for oil is still weak and inventories are also at substantially higher levels. After rising sharply in the last week oil prices can witness profit booking and can find difficult to trade above $70 per barrel. We expect NYMEX crude to meet with resistance around $72.30 levels. On the downside, we expect the prices to be strongly supported around the $63 levels. MCX June Crude Oil futures have support at Rs. 3150/2980 and resistance is seen at Rs. 3350/3490 per barrel.

Rubber
Weak to steady trend was visible in the rubber market. But Futures prices hovered around Rs 100 with some weakness seen in the early days of the week that led RSS 4 June to close at Rs 98.69. Spot rubber marked lacked quantity buyers from major consuming industries. With difference in Indian and global prices of RSS$ at Rs 18-20 per kg, imports are turning attractive while exports targets are difficult to achieve.

The total exports during April-May fell 88 per cent, compared with the same period last year. Just 818 tonnes were shipped during the two months against 6,849 tonnes in the corresponding period of the previous year. Local price of RSS-4 grade is being quoted at Rs 100 a kg while the global price is at Rs 82 a kg.

Towards weekend Spot rubber turned better on Fridayon covering purchases following the gains in futures on National Multi Commodity Exchange. Major manufacturers were buyers on sheet rubber at Rs 99 a kg while the grade firmed up to Rs 100 from Rs 99 a kg on supply concerns. The trend was mixed.

The June futures for RSS 4 improved to Rs 100.30 (99.77), July to Rs 98.64 (97.76), August to Rs 95.91 (95.29) and September to Rs 93.40 (92.50) a kg on NMCE.

Globally,rubber futures remained weak on speculation that higher prices may slow purchases by the automobile industry although rising crude oil prices are supportive for rubber. Speculation that demand in China would increase on growing car sales had led to 25% growth in global rubber prices this year.


Base Metals
In the last few days, base metals have rallied sharply on the back of a weaker dollar and buoyant equities. Financial markets across the globe were hoping for a faster recovery from the economic crisis. But weak data now and then reminds that the crisis is still ongoing. Hence, we feel that the current rally in base metals may not be sustainable as it is not on the basis of improvement in demand but mainly due to positive cues from the equity markets and a weakness in the dollar. We feel that base metal prices could continue to face pressure on the downside prior to the weekend.

The release of the not so positive US economic data could dampen sentiments ahead of the weekend. Hence, we recommend investors to trade on a cautious note. Overall we feel that Copper prices could head lower in the medium term but the dips could be relatively short-lived as lower prices attract production cutbacks and strategic buying by the SRB. However, we expect real recovery in demand to come in by the end of this year as the brightest aspect for the base metals market is the stimulus packages. Since the Chinese stimulus package of $586 billion is infrastructure intensive, we feel that demand for copper could rise tremendously in the long-term.

Pepper
Pepper market this week was marked by high volatility. Towards weekend India pepper futures climbed up as concerns on slackening demand was offset by fresh domestic buying. Both bulls and bears were active. June contract was up by Rs 52 a quintal on NCDEX to close at Rs12,465. July and August moved up by Rs 28 and Rs 50 respectively to close at Rs12,587 and Rs 12,765 a quintal.

The sentiments are still weak on lacklustre overseas and domestic demand. .Prices have fallen close to 6 percent this week from their May 4th high of 13,220 rupees.

Overseas sales have taken a hit as Vietnam, the largest producer, continues to sell at a discount to Indian rates in the overseas markets Meanwhile, overseas reports saying that Vietnam has hiked its prices by $50-75 a tonne following enquiries reaching there from buyers from various markets including India, have also contributed to the upward swing, they said.
Pepper prices (NCDEX June 09 Contract) closed at Rs.12,469/qtl up by Rs.56/quintal as compared to Thursday’s close of Rs. 12,413/qtl.

Pepper futures after making a recent high of Rs.12,581/qtl are trading in rangebound manner tracking sluggish trades at the domestic market. Prices are likely to be steady with a weak bias in the coming weak.

Soybean
NCDEX July Soybean futures moved in a narrow range of Rs 2602.50-2659 per quintal during the last week amid lackluster demand. Arrivals of soybean were steady around 60,000-65,000 bags per day during the last week in major mandis of Madhya Pradesh. Rains play a crucial role for soybean planting in all the major soy growing areas in India. Soybean plantation is depending upon the arrival of monsoon. USDA’s weekly export figures released on Thursday, it shows negative figures for soybean due to China’s cancellation of 1,12,600 metric tonnes of soybean.

Net export sales of soybean were 36,500 tonnes. Sales need to average just 1,000 tonnes each week to reach the USDA forecast. Net export sales of Meal were 1,59,700 tonnes. Sales need to average 77,000 tonnes each week to reach the USDA forecast. In the coming week, prices are expected to move slightly up due to lower stock of soybean and strong movement in soybean and soy meal futures at CBOT and soybean plantation may be delay in Maharashtra due to slow pace of monsoon. NCDEX July soybean has support at 2555/2520 and resistance is seen at 2680/2720 levels in this week.

Guar Seed
Guar prices have corrected by almost 11% in the past 4-5 weeks as weather department’s first long range forecast (in April) had predicted that the monsoon will be near normal in the coming season (June –Sept). However, during the last week, prices settled slightly higher at Rs. per qt . Guar is the rain fed crop and the first long range weather forecast always plays a crucial role in determining the trend in Guar prices. T

he second long range forecast which would released by mid June would decide the further trend in Guar complex in the short term. Apart from monsoon, one more factor which would decide the further trend in Guar is the sowing acreage. It is expected that in the coming season farmers might shift to the other remunerative crop like cotton, which had fetched good returns in the past 3-4 years. Thus, despite normal monsoon, prices will not fall much from the current levels. Sowing of Guari which normally starts from May 15 & continues till June 15, has not yet started in the current season. Actual sowing of guar (30% gum content) crop would take place in mid July.

Guar prices are likely to trade in the range of Rs. 1650-1750 per qtl till the expiry of June contract. This is because the expectations of decline in acreage would limit the downside whereas the good monsoon progress would cap the gains at higher levels. Monsoon will play a major role in deciding the trend in Guar complex in the long term and thus a close watch is necessary during the monsoon season. IMD would give its 2nd long Range weather forecast by mid June. This would decide the further trend in Guar complex.

Wheat
In US CBOT, wheat futures are volatile and up on fund buying while in India wheat futures have been bearish on rising stock concerns. Currently, government agencies have procured huge stocks in the domestic markets due to a record production of wheat. The only factor which is supporting the Indian Wheat prices is the rising international prices.

Fund buying, stabilizing equities, and gains in crude oil and soybeans helped support the bounce in CBOT during middle of the week although fundamentals weren’t supportive of a bounce. On Thursday, commodity funds bought an estimated 5000 contracts.

Keeping aside the huge stocks in the global markets, the bullish factors which is supporting the international wheat prices are deterioration of the US winter wheat crop (45% in good-to-excellent condition as of May 24, -3 pts from the prior week) and delayed spring wheat plantings (79% as of May 24 vs. the 5-yr avg of 95%. Late on Monday USDA placed the U.S. spring-wheat crop 89% planted vs. 5-year average of 98%. Wheat prices may trade in range of 1080-11150 levels.