Commodity outlook: Gold emerging from the shadows, but oil remains at shale’s mercy

It was a recurring theme that rippled through asset classes in 2018-19. Commodities bore the brunt as the trade clash between the world’s two largest economies took many twists and turns.

Be it crude oil or agri commodities, the Sino-US tariff war remained a key overhang for investors.

Belying expectations, gold and crude sobered up while select agri commodities rallied up to 80 per cent.

Will it be a sense of deja vu this year too? Let’s find out.

Gold: A rally that never came
All through the year, analysts bet money on a rally in bullion that never saw the light of day. Gold on Commex lost steam by 4.5 per cent while it eked out a minuscule 2.74 per cent return in rupee terms as the domestic currency fell.

On top of it, rising appetite for the dollar gave a tough time to the precious metal.

Interest rate differentials between the dollar and the euro gave the former an edge. Other safe haven asset, the US Treasury bond, too kept its shine, which means it’s a tightrope walk for non-interest bearing gold.

What saved the day was record physical buying by global central banks that kept losses in check, which explains a minor fall on Commex last financial year.

Outlook
Aasif Hirani, Director, Tradebulls Securities, sees gold breaching its resistance level of $1,350 and move towards $1,385 in 2019-20.

That was pretty much on display as the June contracts hovered around $1,292 on April 1.

“Concerns over health of euro zone have increased focus on flight to safety. Gold has benefited as we can see prices trading stronger despite recent strength in the US dollar. Physical buying from global central banks is expected to give support at lower levels,” Hirani said.

He thinks there are sunnier days ahead for gold. “With increasing macroeconomic worries and slowdown in the business cycle, chances of global economic recession are high and so, demand for safe haven assets is expected to increase. Gold has two lesser obstacles to worry about — higher US interest rates and a strong dollar,” Hirani explained.

Crude oil: A story of two halves
Nowhere can you see this contrast better than oil — torn between two sides.

Concerns of oversupply haunted this asset class on the back of US shale output as it turned lacklustre during April-December of FY19. Even Brexit turmoil and trade uncertainty cast a long shadow. But fortunes improved in the previous quarter after Opec output cuts and US sanctions against Iran and Venezuela amid signs of progress in US-China trade talks.

While WTI crude reported a marginal fall of 1.97 per cent for the whole financial year, the commodity delivered a return of 32 per cent for January-March 2019 — its biggest quarterly gain in nearly a decade.

Outlook
West Texas Intermediate crude prices are expected to average around $60-65 in 2019. The May contracts traded at around $61.77 on Monday.

“US producers may pump 13 million barrels per day (mbpd) for the first time in the third quarter of 2020, which can bring back the worries of supply glut. Opec looks determined to continue defending the price, but it has helped shale producers to produce more. Also, the US is expected to become net exporter in the fourth quarter of 2020, with an export level of about 0.9 mbpd,” said Navneet Damani, Vice-President Commodity Research at MOFSL.

Agri-commodities: Diverging fortunes
It was a bag of mixed fortunes for agriculture commodities, with most consolidating.

Analysts said the government’s resolve to keep inflation in check with elections around the corner, the normal monsoon in the last four years and a dip in consumer demand weighed on the prices.

Outlook

There’s a lot to look forward to here. “Agri commodities will perform better in FY20. A key reason is long consolidation over the last two years. Outperformance can be expected, especially in pulses,

cotton

and guar complex. Recent gazette notification by the Centre to limit pulse import to 6.5 lakh tonnes will surely support prices,” said Manoj Kumar Jain, Director, IndiaNivesh Commodities.

Riteshkumar Sahu, Research Analyst – Agri Commodities at Angel Broking has also put out his projections for other commodities as well.

Soybean: It is expected to trade lower in the first two quarters of FY20 unless there is good export demand for meal exports.

Mustard: The commodity is expected to trade higher towards Rs 4,000 per 100 kg mark in the current quarter as major growing states are gearing up to procure mustard at the MSP (Rs 4,200). For the remaining three quarters, export demand for meal from China following a trade dispute with Canada, monsoon forecast and import of edible oil will decide the further course.

Refine Soy oil and Crude Palm Oil (CPO): Edible oil prices have been correcting, tracking weak prices of both CPO and soya oil in the international markets. In the long run, the prices will depend on the government import policies, weather phenomenon in the US and Malaysia/ Indonesia, which are the largest source of soybean and palm oil respectively.

Cotton: Cotton futures may remain firm in FY20, as we see tightening of domestic supplies due to significant drop in cotton production in top two cotton-growing states Gujarat and Maharashtra.

Jeera: Cumin futures closed higher in March after four consecutive months of fall. Going forward, jeera prices expected to trade higher as traders and stockists are actively buying new season crop on anticipation improving export demand as seen last year during the same period. Since the prices are lower and with expectation of good export demand, Jeera prices may trade higher towards 16,500 – 18,000 levels in the current financial year 2020.

Source

Author: Prakash Poojary

Business Analyst

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