By Pritam Kumar Patnaik
Crude oil prices turned softer this week amid increasing concerns about slowing global economic growth that could hit demand for petroleum products as inventories build up. NYMEX WTI September contract fell by over 3 per cent this week while ICE Brent Crude October contract fell close to 2 per cent.
Data showing a large build-up in US inventories stoked fears about outlook for fuel demand. The surprise gain in US stockpiles remained fresh in everybodys mind. Crude inventories increased by 6.8 million barrels, representing the largest weekly rise since March last year.
China and the United States have implemented several rounds of trade tariffs and threatened further duties on exports worth hundreds of billions of dollars, which could knock global economic growth. At the same time, the crisis gripping the Turkish lira has rattled emerging markets and reverberated across equities, bonds and raw materials.
One must also keep in mind the production estimates from Saudi and other OPEC countries, which could potentially move the markets. Last time, OPEC confirmed that top exporter Saudi Arabia had cut production to avert looming oversupply. So, will they continue to do so, we will have to wait and watch. The US data also showed crude output rose by 1,00,000 barrels per day to 10.9 million bpd in the week to August 10.
Technically, on the domestic front, MCX Crude August contract has failed to take support around Rs 4,550 level and made a new low of Rs 4,525 level on a weekly basis. Prices are on the verge of breaking below the upward moving trendline support, along with 20-day EMA for the first time since the start of 2018.
This is indicating that medium term top is in place. Now, as long as we do not see a close above Rs 4,700 level, bias will remain on the downside. It has formed bearish candlestick pattern that suggests bears have an upper hand. We can expect prices to move lower towards Rs 4,300 and Rs 4,230 level in coming weeks.
Bullion prices also tumbled significantly this week as the asset lost out to US Treasuries and a stronger dollar. Investors sought refuge from a financial market rout triggered by a crashing Turkish lira. Ideally, investors should be buying gold, which has been traditionally viewed as a safe haven.
Investors bought dollars as the Turkish lira has tumbled on worries over Turkish President Tayyip Erdogan's increasing control over the economy and deteriorating relations with the United States.
Gold prices were also weighed down after Reuters reported that central banks from emerging markets might have been liquidating their gold holdings to strengthen local currencies due to the lira weakening effect.
Bearish sentiment can be seen in data from US Commodity Futures Trading Commission (CFTC), indicating that the gold speculators added 22,195 contracts to their net short position in the week to August 7, bringing it to 63,282 contracts, the largest since records became publicly available in 2006.
Holdings of the largest gold-backed exchange-traded fund (ETF), New York's SPDR Gold Trust, also fell this week. Data showed that the holding fell to 24.970 million ounces this week, from 25.273 million ounces last week. The holdings have dropped about 10 per cent from their April peak and are at their lowest since February 2016.
Looking ahead, investors could keep track of developments between US and China talks to be held later this month. The Wall Street Journal reported that the talks in Washington would take place on August 21-22, just before $16 billion in new US tariffs on Chinese goods take effect, along with an equal amount of retaliatory tariffs from Beijing.
Additionally, bullion could track the movements of the US dollar. The US currency has remained strong over the last few weeks supported by upbeat data and safe haven demand. So, the next few days of data will be crucial to have an impact on the currency.
Domestically, the Indian currency could impact domestic prices. The rupee has been steadily weakening over the last few weeks.
Indias gold imports rose for the first time in seven months in July after a fall in prices ahead of a jewellery exhibition prompted jewellers to replenish stocks, provisional data from metals consultancy GFMS showed. Indias gold purchases in July soared by 44.2 per cent to 75 mt against the same period a year ago.
So, some respite could be seen for the prices. On the other hand, growing gold imports by the worlds second-biggest buyer of the precious metal might increase Indias trade deficit and turn up the heat on the countrys weakening national currency and could prompt the government to halt imports temporarily.
Technically, on the domestic front, MCX Silver had a worst week in which it lost around 4.54 per cent. This downmove has broken psychological support of Rs 38,000 decisively which indicates negativity will continue in this precious metal.
Over the last 6 weeks, it has continued to form a bearish candlestick pattern and failed to give close above the high of prior bar. The 10-day EMA has continued to act as resistance, which is proxy for the weakness.
Now, on the upside, as long as we do not see a close above Rs 38,000 level, trend will remain negative. On the downside, next level to watch will be Rs 35,500 levels.
Internationally, Comex Silver spot lost its ground and broke below the support of $15.16 levels. Post that, it has made a low of $14.31 level till now. This is a weakness of around 6.71 per cent on a weekly basis.
There is no sign of reversal yet on daily as well as weekly chart, which is going to keep the trend on downside.
Looking at the channeling technique on weekly chart, prices can move lower towards $13.84 levels in coming sessions. On the upside, $15 will act as important resistance as per polarity reversal. The 10-day EMA has continued to sustain below 20-day EMA, which suggests more weakness.
(Pritam Kumar Patnaik of Reliance Commodities analyses outlook of various commodities)