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G. Chandrashekhar

Rise in speculative short positions in oil & long positions in gold

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Mumbai Feb. 6 The trend in oil prices has reversed. Moving rapidly up, the market is now approximately 20 per cent above the mid-January lows. The strength has surely surprised many who had expected at least a brief period of consolidation.The market has moved up due to many reasons. While the proximate cause for the sentiment was boosted by colder US weather, there is a relative decline in inventory levels of major OECD economies, leading to a steady tightening of supplies.

Short Positions

OPEC's further cuts (five lakh barrels a day from current levels) effective February 1 is also a factor to reckon with. The speculative short positions in the oil market continue to grow and are now at all time highs. During January, gross short positions in the US oil and refined products futures markets increased to all-time highs, and despite an end to the price downturn, Friday's CFTC data showed that there has been relatively less covering thus far.

As there is very substantial short covering still to come, a significant move above $60 a barrel cannot be ruled out, experts asserted. The silver lining to the otherwise bleak scenario is of course greater overhang of inventory for gasoline and heating oil. It is clearly becoming evident that crude oil prices have a further upside in Q1 of this year, but gasoline and heating oil may not perform so strongly.

On precious metals, it must be stated that the investors' positive mood is continuing. The latest CFTC data revealed a large increase in net speculative long positions for gold, platinum and palladium.

Demand Consolidation

Gold's price prospects too seem to be on the positive side over the current year. A series of key price-determining factors are set to turn more positive for the metal.

From a fundamental perspective, fabrication demand has shown signs of stabilising following last year's sharp fall.

Demand can be expected to consolidate and even firm up over the year as consumers get used to high prices and see little prospect for a downward correction.

Hedge Book

On the supply side, there are both positives and negatives that largely cancel each other. The potential for slower sale from central banks offsets reduced scope for producer de-hedging in line with shrinking global hedge book.

An additional factor is the tense geopolitical environment. It can turn more serious, but not benign, in the view of several experts. Largely due to establishment of fresh long positions, net fund length in gold rose last week to its highest since mid-August 2006.

More Stories on : Commodity Markets | Outlook | Gold & Silver | Petroleum

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