Commodities

Crude oil, gold on the rise — for different reasons, though

G Chandrashekhar | Updated on May 19, 2020 Published on May 19, 2020

A big surge in demand is unlikely to materialise any time soon   -  REUTERS

Commodity markets are showing significant upward traction in prices under the lead of crude oil. Gold and select base metals, too, are rising. Obviously, some optimism is beginning to pervade; but what’s the basis?

The hope of finding a vaccine against the deadly coronavirus is rising. Many countries, especially in Europe, are beginning to lift lockdowns hoping that economic activities will begin to revive. All this translates to a slow return of risk appetite.

So, is this the beginning of a sustained increase in prices after the collapse in recent months or is it some kind of a false dawn? The jury is still out.

Interestingly, in just about a month’s time, crude oil prices have galloped from their record lows. Remember, on April 20, WTI price went into the negative territory because of overflowing storage installations while Brent collapsed well below $20 a barrel.

Now, both WTI and Brent have gained substantially, with the latter testing $35 a barrel and WTI around $31. The price differential between the two stands further narrowed. The drivers are evident. The US oil production is now declining rapidly. The oil rig count is at multi-year lows. Additionally, the OPEC+ production cut has kicked in already.

Demand recovery

At the same time, the demand side is looking less threatening that before. China’s oil demand is reportedly recovering rapidly and may soon reach pre-Covid levels.

No wonder forward prices are even higher. If the optimism holds and price continues to stay north of $30 a barrel, there is every reason to believe the US shale output may not fall any further, but may start to recover (See BL Commodity Commentary May 8 “Will the improving crude oil market sentiment last?”).

If anything, the US administration is providing direct and indirect support including tax rebates to its oil and gas industry, where an estimated 50,000 persons have already lost jobs. Institutional investors and retail investors are showing interest. Rising prices will also attract more speculative capital, which, in turn, is sure to boost the market.

Not to be left behind, gold continues to trade higher, well above $1,700 an ounce, around which it was languishing for some time. On Tuesday, it was at $1,730. Disastrous US economic data and doubts about a sharp recovery in economic activity have combined to prop the yellow metal higher.

Talks of negative interest rates in the US and risk of renewed trade friction with China are adding to the fear. (See BL Commodity Commentary May 13 “Gold in tight range, but bullish conditions are brewing”). Indeed, ETF inflows are rising rapidly.

Haven status

Given the ongoing uncertainties and massive liquidity available, the outlook for gold is constructive. The metal has the potential to test $1,800/oz if economic health conditions were to deteriorate further. Gold will reassert its haven status.

At the same time, the physical demand for gold is going to the dumps. Imports into two of the world’s largest markets — China and India — have collapsed. Rising domestic prices have all but killed retail demand.

Once equity markets begin to improve, there is risk of less-committed investors exiting the yellow metal. When it would happen is anybody’s guess.

The writer is a policy commentator and commodities market specialist. Views are personal.

Published on May 19, 2020

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.

Related

  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.