Bullion, copper, crude oil – all look vulnerable

Global commodity markets faced headwinds in April and prices struggled within a narrow range. This followed the resurfacing of macroeconomic concerns in Europe combined with apprehensions over slowing growth prospects in China. The nascent recovery signals in the US also came in for scrutiny. All these resulted in prices of major commodities – energy and metals in particular — trending down.

Last week, prices saw correction with oil – June Brent – falling to its lowest level since early February. Inventories are seen building in the wake of softer demand conditions and OPEC output reaching three year highs. Geopolitical tensions have eased considerably with Iran returning to the negotiating table.

The US non-farm payrolls disappointed expectations with a rise of 115,000 and the unemployment rate ticking down slightly to 8.1 per cent. With disappointing data from the US and Europe, over the week, metals traded lower. All precious metals were down week-on-week with silver showing the sharpest fall of 4 per cent. Gold prices declined 1.2 per cent. Base metals were no different with tin down 4.6 per cent and copper 3.6 per cent over the week.

However, beyond the short-term weakness, there is expectation that oil prices will find support when the market moves into the third quarter. As for metals, global industrial output is trending higher and real demand in China is starting to increase. This bodes well for industrial metals. Supply response is highly likely to drive relative performance in the second half of the year. Agricultural prices also pulled back last week; but corn and soyabean prices are likely to stay firm because of fundamental tightness.

Gold: Trapped in a narrow range prices are struggling to break out but with little success. In London on Friday, the PM Fix for gold was $ 1,644/ounce, edging up from the previous day's $1,638/oz. Silver was under pressure with Friday AM Fix falling below $30/oz to $29.90/oz versus previous day's $30.36/oz.

Investment flows into gold have softened. Preliminary ETP data showed an outflow of about 12 tonnes last month. Also, speculative interest for gold and silver has fallen as per CFTC data. Physical demand is soft, especially in India where consumers are unable to enjoy the benefit of softer overseas prices (in dollar terms) because of rupee depreciation. Demand is most likely to remain weak into the foreseeable future as farmers in India return to their fields for the planting season. This week, the Union Government is likely to take a call on customs duty and excise duty on gold imports and jewellery. Relief, if any, would be negligible as the Finance Ministry is still grappling with issues of fiscal deficit, rapidly weakening currency and untamed inflation.

There are no identifiable triggers at the moment for gold prices to move sharply up breaking above $1,675 levels. On the other hand, demand weakness can potentially pull prices further down. According to technical analysts, any near-term weakness in gold is expected to find buying interest near 1,600. For silver, one can look for signs of a base near 28.60 and expect a subsequent bounce higher toward 31.50. The medium term outlook is neutral.

Base metals: The entire complex has been under pressure in the wake of slowing Chinese demand conditions and global growth uncertainties. Market participants do not rule out further worsening of demand conditions which will have implication for prices.

On Friday, LME cash copper was $8,254/t. According to reports, in the last six months, LME stocks have been declining but cancelled warrants (which are stocks on LME earmarked for delivery) have increased rapidly and now account for 45 per cent of the total stocks as compared with the normal/typical of about 5 per cent. This leaves the available copper stocks on the exchange at the lowest level since 2008.

In particular, Chinese copper inventories are high and imports in the next few months may slow. However, beyond the weakness of Q2, the macroeconomic picture for H2 would be a critical market driver; and there is cautious optimism about revival of growth. This means price dips in Q2 should be viewed as buying opportunities for the second half of the year.

According to technical picture, further weakness in copper can be expected. Below support near 8,000 signals a move toward target at the 7,885 range lows. The downside break in aluminium confirms bearish view toward the 2,025/2,040 area. The medium term outlook is range-bound.

Crude: Amid recent softness, the market is looking for direction from a fundamental perspective. While supplies are satisfactory, demand conditions are not really so. In technical terms, both Brent and WTI crude have broken lower. Analysts have extended their near-term downside target for Brent toward 109 and for WTI, the downside risk is seen toward 97 area. The medium-term outlook is bearish.

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