The Hindu Business Line : Commodities may recover on tight fundamentals

Bouncing back
Investor interest in the yellow metal could wane in the near future.
All short-term base metals price targets are being revised upwards.

Mumbai , Oct. 17

A fragile recovery in energy prices is underway and with marked reduction in the overhang of speculative length in oil over the past eight weeks, selling pressure is dissipating.

As fundamentals tighten with the run-up to peak winter demand over the coming months, prices have the potential to recover if OPEC can persuade the market of its intention to follow through on planned production cuts, according to analysts.

Slow signs

Speculative selling of oil has continued to show signs of a marked slowing in recent weeks. Last Friday's data showed little change in the balance of CFTC non-commercial positions in the oil market last week, marking a break from the recent trend in place since mid-August, whereby, speculators had cut long positions back very substantially, eventually resulting in a move into net short territory in the prior week. Friday's data showed that speculators in oil and refined product futures markets retained a small net short position.

Precious metals

Belief that the recent strength in the dollar is largely attributable to the steep fall in oil prices is gaining ground. If oil prices firm up again, the currency is bound to resume its downward path. The possibility of strong recovery in oil prices given the movement towards winter season means that there could be a scope for dollar weakness in the months ahead. This should benefit gold.

However, in the near term, the absence of positive support from macroeconomic environment, prices are likely to trade largely sideways, consolidating at recent low levels. Importantly, fundamentals remain weak (Indian seasonal demand notwithstanding).

Investor interest in the yellow metal could wane in the near future, pressing the market down further.

Meanwhile, latest CFTC data showed that speculators have continued to cut their exposure to Comex gold, with net fund length falling further largely on the establishment of fresh new shorts.

Tactical investors have maintained a negative view towards platinum with speculative positions facing a hefty cut, while speculative interest in palladium is holding up better.

Base metals

After an extremely positive LME week with reports of strong underlying demand and continued pessimism over short-term supply prospects, there are considerable upside risks across all the metals markets as speculative shorts cover and fresh consumer buying emerges.

All short-term base metals price targets are being revised upwards. Tin and zinc are said to have the best short-term prospect. On copper, analysts are bullish because of a big increase in Chinese buying in September.

Nickel prices too can register gains because of positive demand from the stainless steel sector and low level of LME stocks.

Agriculture

Grain markets have seen robust price action in recent times.

Wheat prices are supported by supply shortfalls (setback to Australian wheat) and low global stocks, while corn (maize) market fundamentals favour firm prices given buoyant demand by China for feed purposes and for bioethanol use in the US.