The Hindu Business Line : Speculative length crucial to commodities' progress

Pointers
Total net length in crude oil market still high; scope for further liquidation if investors' sentiments turn bearish.
Aluminium likely to continue to move higher.
Weather crucial to determind agri commodities fortunes.

Mumbai , May 31

With the recent slide in prices following liquidation of speculative positions and onset of summer in the northern hemisphere, players in the commodity market have begun to look for market-specific factors that would impact prices.

Speculative length on the bourses would be a crucial pointer to the way market could move.

For instance, as latest CFTC (Commodity Futures Trading Commission) data show, despite the recent cut in net long speculative position due to long liquidation, net length in the crude oil market remains largely positive.

Peak demand season

Interestingly, crude oil prices have resumed their strength over the last few trading sessions as markets have refocused on geo-political tensions and gasoline supply tightness just as the markets have unofficially entered the peak demand summer driving season (especially in the US). Adding a punch to prices is the forecast of above-normal Hurricane season.

Nevertheless, with total net length in the crude oil market still high relative to historical standards, there is scope for further liquidation should investors' sentiment turn bearish. However, the strength of fundamentals is expected to provide a floor to any significant price slide.

In the precious metals market, volatility has been a key feature.

Participants nervous

Participants remain nervous after the recent sell-off. No doubt, the market has found some investor and physical support at lower numbers, but the sentiment remains fragile and a near-term weakness cannot be ruled out. In Comex gold, the latest data reflected a reduction in the gross long position accompanying the price correction last week, which was partly offset by some short-covering. The gross long position is now at its lowest since mid-March 2006 and a long way below levels in late 2005.

This indicates a more sustainable level of speculative involvement for further gains ahead, while macroeconomic conditions and geopolitical risks are also seen as positive for gold in the coming months, according to Barclays Capital.

Prospects positive

While base metals as a whole tend to move largely together as a complex, market-specific factors will determine the fortunes of each metal. Price prospects for copper and zinc appear particularly positive given both demand side and supply side factors.

The latest CFTC data show the non-commercial net short position in Comex copper grew larger in the week ending May 23 as long positions were liquidated and fresh short positions were established.

Aluminium, on the other hand, is likely to continue to move higher in a more measured fashion because of a potentially less constrained supply side.

Nickel has solid fundamental support from a strong buying appetite from the stainless steel sector and associated inventory drawdowns on the LME.

Corn crop estimates

In the case of agricultural commodities, corn and sugar are in the limelight. High crude prices continue to support demand for renewable energy sources.

There is strong upside bias to corn (maize) prices because of diversion of the commodity for production of ethanol (to be doped with gasoline). The USDA projection of lower corn crop as per prospective planting report is supportive. In the case of sugar too, the market sentiment is positive because of ethanol demand.

However, the next four months June-September are crucial for agri-commodity markets as weather would play a critical role in setting the market direction.

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