Crude, gold & metal markets may test higher levels

G. Chandrashekhar

Outlook


Product demand

remains extremely strong for crude.

Gold could

be prone to profit-booking.

Supply disruptions

have made metals market look bullish.

Mumbai, July 16

Oil prices continue to set new record highs, with WTI front month breaking through $78 a barrel on Friday.

All months between January and April 2007 are currently trading at above $81/barrel.

The latest price surge has shattered numerous records for oil prices even as geopolitical events push the market higher against a tight fundamental background.

Escalating tensions

The escalation of conflict between Israel and Lebanon, coming on top of a worsening Iranian situation, and concerns over suppliers from Nigeria, have all combined to trigger this price rally.

Given the tight demand-supply fundamentals, the oil market remains extremely vulnerable to shocks. The threat of hurricane in the US is another looming factor.

Therefore, a further upside to the market, at least in the short-term, seems highly likely.

The bullish sentiment is evident not only in crude oil values, but also in product markets.

This underlines the fact that product demand remains extremely strong and that inventory levels are viewed as tight, especially for key products such as gasoline.

Gold's increasing appeal

Precious metals

: Geo-politics and inflation concerns continue to push investors towards gold. Political unrest in West Asia and adjoining region triggered the price rally. The yellow metal's safe haven appeal is only increasing with prices rising to $666 an ounce.

From a broader standpoint, the current uncertainties and concerns are creating a favourable climate for gold to test even higher levels. But investors need to exercise caution. Although the general sentiment towards gold is positive primarily because of the possibility of geopolitical situation worsening, rather than improving the metal continues to remain vulnerable to profit-taking at higher price levels. Strengthening dollar against the euro and the yen weighed on the sentiment. The macro-economic environment too is less supportive for gold because of the prospect of a further rate hike in the US and near-term dollar strength.

Therefore, there is the risk of downward correction over the coming weeks, should geopolitical tensions recede.

Metals seen buoyant

Base metals

: Potential strikes that may lead to supply disruption and steadily declining inventories highlight the constrained supply side for most of the base metals.

Copper prices (cash) registered a new high of $ 8,225 a tonne on LME Friday last, while third month was quoted at $ 8,110/t. Stock levels at warehouses are tightening. China is believed to have de-stocked by at least 50,000 tonnes in the first half of the year. Shanghai Futures Exchange reported a drawdown of copper stocks of 3,000 tonnes over the week. Currently, inventory is estimated at 61,100 tonnes.

Total reported stocks remain under three weeks of consumption, still critically tight. Added to this are concerns over supply disruptions. The underlying sentiment in the market is expected to remain buoyant until the supply situation becomes clear.

The aluminium market too has remained firm with prices at $ 2,640/t (LME 3 month). Both LME and Shanghai reported fall in stock over the week. Current stock levels are in a position to meet demand of six-and-a-half weeks, and probably only around one week (50,000 tonnes) away from becoming critically tight.

(This article was published in the Business Line print edition dated July 17, 2006)
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