Amid easing global crude oil prices and overhang of the uncertainty over hike in interest rates by the US Fed, Naveen Mathur shares his views with Tulemino Antao on the trends in crude oil, precious metals, rupee trends and other food commodities
Global crude oil prices seem to be facing resistance above $50/barrel. Is the inherent weakness still persists with global demand remaining weak and what trends do you forsee for the medium term?
Crude oil prices have been facing strong resistance above $50 a barrel as output from the Organization of the Petroleum Exporting Countries (OPEC) has hit records in a bid to squeeze out competition like Russia, where production is also near records, but especially from U.S. shale producers which, however, have so far been resilient to the resulting price plunges and kept pumping oil. Saudi Arabia’s strategy for rebalancing the oil market through a period of lower prices shows few signs of working so far, with rival producers claiming they will raise output even as prices slide to new lows. On the other hand, official data from China showed that its manufacturing sector contracted at its fastest pace in three years in August, reinforcing concern over the health of the world's second-largest economy. China's falling auto sales have been at the forefront of concerns that its economy is slowing much faster than expected, weighing on oil prices. Oil prices continue to witness bearish sentiments as markets remain over supplied and there is no positive news on the demand side from any corner of the globe except the US economy which seem to be growing. So the inherent weakness still persists in the oil market and unless we see green shoots of recovery in the European economies as well as China crude prices will be under pressure. The downside for WTI crude (CMP: $45/bbl) prices can be seen till the extent of $38 while Brent oil (CMP: $48/bbl) downside can be seen to the extent of $40 per barrel.
Gold prices which had dropped below Rs 25,000/10 gms recently have bounced back are trading around Rs 26,500 levels. Have the prices bottomed out for the near term and what could be the impact if US Fed hikes interest rate later during the year?
Worries over a slowing Chinese economy sparked a wave of short-covering earlier in August’15. Weak factory growth in China fanned worries that the world's second largest economy may be slowing sharply, sparking safe-haven demand for the metal. Activity in China's factory sector shrank at its fastest pace in almost 6-1/2 years in Aug’15 as domestic and export demand dwindled. Lingering uncertainty over the implications of China's Yuan devaluation also acted as a positive factor for the yellow metal. Gold prices on the MCX have been trading around Rs26500 mark in the recent weeks as uncertainty over the rate hike by the US Federal Reserve has been delayed for the time being. While investment demand continues to be weak as outflows from the SPDR gold trust continue to create bearish sentiments for the yellow metal. If the rate hike happens probably in December, the gold prices in the International markets might head lower towards $1000 mark while MCX gold prices can head lower towards Rs.24500 mark per 10 gms.
What is the stance of global fund managers on silver after the price correction? Is the commodity likely to weaken further or consolidation would continue?
Through July 24, global silver ETF holdings increased by over 4.7 million ounces in 2015, indicating that investors likely have a more positive longer-term view of the silver price. According to GFMS, the global supply of silver is estimated to be 31850 tonnes while the demand side is estimated at 32455 tonnes, leading to a net deficit of around 600 tonnes in 2015. Additionally, the silver market is expected to be in a deficit of 57.7 million ounces in 2015, as supply contracts and physical demand grows. On the other hand, the ratio of gold to silver averaged 73 in the first half of 2015, indicating that silver is under priced relative to gold. This gives way to increased potential for buying in the silver market. Silver will be the favoured asset because of the low prices and hence prices will trend higher going forward. Low prices and revived investment and industrial demand from Asian economies will be the key to invest in the commodity going forward. From an investment point of view, one should enter the commodity at current market prices (CMP: Rs.34870/kg) for a possible target of around Rs.38000/kg by the end of the ongoing financial year.
With spate of weak economic data, what is your call on copper prices for the current calendar year?
China accounts for around 40% of global copper consumption and as a result, slowdown in the nation spells doom for copper prices. In 2015, the red metal declined to near six and a half year low levels saddled by weakening Chinese economy burdened by soft domestic demand, weak global appetite for its exports and a sluggish property market. The latest string of unfavorable data from the Asian giant has only acted as fresh evidence of a serious weakness in Chinese economy despite repeated intervention by the PBoC and the government. Hence, we except LME Copper prices to trend lower towards 4600 levels (CMP: 4970/tonne) and MCX Copper to decline to 310 by Dec’15 (CMP: 333/kg).
Have certain mine closures any impact on Zinc prices and what trends do you foresee for Nickel for the medium term?
Impending closure of two large zinc mines, Century in Australia and Lisheen in Ireland insulated Zinc prices from the selloff in the base metals space in the earlier part of 2015 owing to expectations of deficit this year. As of now, deficit hopes have been put to ease as weaker than estimated demand from China along with build-up of Zinc stocks at LME warehouses in New Orleans is likely to shift the market to balance or surplus in 2015. As far as the Nickel prices are concerned, the Indonesian Government recently reiterated that the ban remains in place as the relaxation of the mining policy would harm its commitment to fully implement the 2009 Mining Law. The absence of supply from the country is in line with the shaky demand segment and enhanced production volume coming from producers. Still, it is likely that the ban could pave the way for a supply deficit in case the demand pickup finally happens. The only savior for Nickel prices in 2015 would be an overwhelming demand, which is quite unlikely given the seriousness of the slowdown in China and ambiguity regarding the Federal Reserve decision on the first ever US rate hike in nearly a decade. Hence, we except LME Nickel prices to trend lower towards 9200/tonne levels (CMP: 9880/tonne) and MCX Nickel to decline to 620/kg by Dec’15 (CMP: 657/kg).
With scanty rains across the country and crop failures at various locations which are the most active in the spices segment for trade for the last three months of calendar 2015?
As per the, Met Department, the rain deficit during current monsoon has fallen back to 14 per cent despite late surge over southern peninsular India and parts of North-West regions. This deficit may affect the Rabi sowing. Among spices, turmeric and Jeera (Cumin) may be the most active commodities for trading in next three months in 2015. Now since the monsoon is finally withdrawing from north-west and adjoining central India, the deficient soil moisture may affect jeera sowing while the turmeric crop has already received much-awaited showers during second half of September.
The price of jeera, which is a Rabi crop, has been in down trend recently on limited buying by the traders due to weak export orders. Currently, jeera from Syria and Turkey dominated the world market in September-October. During the next three months, Jeera supply is expected to remain tight as the last year production estimated were down by 42 per cent in Gujarat. Thus, prediction of lower stocks holdings for the good quality jeera with stockists may surge up the prices in near future as new crop will come next March-April. However, progress of jeera sowing in Gujarat and Rajasthan coupled with the export demand may keep the prices at higher levels. In case of turmeric, the prices during the monsoon season have surged to Rs 9,000 per quintal during the first week of September from Rs 7,500 levels due to reports of moisture stress and slow sowing progress in Karnataka, Telangana and Maharashtra. However, the prices have pulled back to Rs 7,800 levels during the second half of September on revival of rain in southern peninsula. In the coming months, turmeric prices are expected to trade on negative bias, on expectation of good production this year. However, expectation of good upcountry and export demand may keep supporting the prices at higher levels as farmers are anticipating good quality turmeric this season which may fetch higher prices.
The Indian rupee has been weakening against the US dollar and is trading near Rs 66 levels to the US currency. What levels do you see for the rupee in case of rate hike by the US Federal Reserve?
In spite of recent disappointing data releases, the overall trend of the labour market and housing sector shows drastic improvement. However, troubling external factors such as Yuan devaluation and plunging oil prices stood in the way of the FOMC’s rate hike decision (September). The US Central Bank kept the federal funds target range unchanged at 0-0.25 percent .They pointed towards an uncertain outlook for global economic growth and hinted towards a rate hike by the end of 2015 provided it is reasonably confident about the nation’s labor market and inflation rate. The Federal Reserve Chairwoman has kept a hawkish tone in all her speech and has warned the markets to be prepared for a possible rate hike by December. This will act as a negative factor for the emerging market economies as investors will shift towards US for investments which will result in huge outflows and will weaken the Indian Rupee. However, the recent rate cut of 50 bps by the RBI along with new proposals and projects undertaken by the new government will attract huge inflows thereby stabilizing the overall economy. Moreover, the Reserve Bank of India has sufficient reserves to keep the Indian Rupee supportive. Due to all the above factors, the Indian Rupee is expected to depreciate to 68.20 levels if the US rate hike happens in the near future.
Global crude oil prices seem to be facing resistance above $50/barrel. Is the inherent weakness still persists with global demand remaining weak and what trends do you forsee for the medium term?
Crude oil prices have been facing strong resistance above $50 a barrel as output from the Organization of the Petroleum Exporting Countries (OPEC) has hit records in a bid to squeeze out competition like Russia, where production is also near records, but especially from U.S. shale producers which, however, have so far been resilient to the resulting price plunges and kept pumping oil. Saudi Arabia’s strategy for rebalancing the oil market through a period of lower prices shows few signs of working so far, with rival producers claiming they will raise output even as prices slide to new lows. On the other hand, official data from China showed that its manufacturing sector contracted at its fastest pace in three years in August, reinforcing concern over the health of the world's second-largest economy. China's falling auto sales have been at the forefront of concerns that its economy is slowing much faster than expected, weighing on oil prices. Oil prices continue to witness bearish sentiments as markets remain over supplied and there is no positive news on the demand side from any corner of the globe except the US economy which seem to be growing. So the inherent weakness still persists in the oil market and unless we see green shoots of recovery in the European economies as well as China crude prices will be under pressure. The downside for WTI crude (CMP: $45/bbl) prices can be seen till the extent of $38 while Brent oil (CMP: $48/bbl) downside can be seen to the extent of $40 per barrel.
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Gold prices which had dropped below Rs 25,000/10 gms recently have bounced back are trading around Rs 26,500 levels. Have the prices bottomed out for the near term and what could be the impact if US Fed hikes interest rate later during the year?
Worries over a slowing Chinese economy sparked a wave of short-covering earlier in August’15. Weak factory growth in China fanned worries that the world's second largest economy may be slowing sharply, sparking safe-haven demand for the metal. Activity in China's factory sector shrank at its fastest pace in almost 6-1/2 years in Aug’15 as domestic and export demand dwindled. Lingering uncertainty over the implications of China's Yuan devaluation also acted as a positive factor for the yellow metal. Gold prices on the MCX have been trading around Rs26500 mark in the recent weeks as uncertainty over the rate hike by the US Federal Reserve has been delayed for the time being. While investment demand continues to be weak as outflows from the SPDR gold trust continue to create bearish sentiments for the yellow metal. If the rate hike happens probably in December, the gold prices in the International markets might head lower towards $1000 mark while MCX gold prices can head lower towards Rs.24500 mark per 10 gms.
What is the stance of global fund managers on silver after the price correction? Is the commodity likely to weaken further or consolidation would continue?
Through July 24, global silver ETF holdings increased by over 4.7 million ounces in 2015, indicating that investors likely have a more positive longer-term view of the silver price. According to GFMS, the global supply of silver is estimated to be 31850 tonnes while the demand side is estimated at 32455 tonnes, leading to a net deficit of around 600 tonnes in 2015. Additionally, the silver market is expected to be in a deficit of 57.7 million ounces in 2015, as supply contracts and physical demand grows. On the other hand, the ratio of gold to silver averaged 73 in the first half of 2015, indicating that silver is under priced relative to gold. This gives way to increased potential for buying in the silver market. Silver will be the favoured asset because of the low prices and hence prices will trend higher going forward. Low prices and revived investment and industrial demand from Asian economies will be the key to invest in the commodity going forward. From an investment point of view, one should enter the commodity at current market prices (CMP: Rs.34870/kg) for a possible target of around Rs.38000/kg by the end of the ongoing financial year.
With spate of weak economic data, what is your call on copper prices for the current calendar year?
China accounts for around 40% of global copper consumption and as a result, slowdown in the nation spells doom for copper prices. In 2015, the red metal declined to near six and a half year low levels saddled by weakening Chinese economy burdened by soft domestic demand, weak global appetite for its exports and a sluggish property market. The latest string of unfavorable data from the Asian giant has only acted as fresh evidence of a serious weakness in Chinese economy despite repeated intervention by the PBoC and the government. Hence, we except LME Copper prices to trend lower towards 4600 levels (CMP: 4970/tonne) and MCX Copper to decline to 310 by Dec’15 (CMP: 333/kg).
Have certain mine closures any impact on Zinc prices and what trends do you foresee for Nickel for the medium term?
Impending closure of two large zinc mines, Century in Australia and Lisheen in Ireland insulated Zinc prices from the selloff in the base metals space in the earlier part of 2015 owing to expectations of deficit this year. As of now, deficit hopes have been put to ease as weaker than estimated demand from China along with build-up of Zinc stocks at LME warehouses in New Orleans is likely to shift the market to balance or surplus in 2015. As far as the Nickel prices are concerned, the Indonesian Government recently reiterated that the ban remains in place as the relaxation of the mining policy would harm its commitment to fully implement the 2009 Mining Law. The absence of supply from the country is in line with the shaky demand segment and enhanced production volume coming from producers. Still, it is likely that the ban could pave the way for a supply deficit in case the demand pickup finally happens. The only savior for Nickel prices in 2015 would be an overwhelming demand, which is quite unlikely given the seriousness of the slowdown in China and ambiguity regarding the Federal Reserve decision on the first ever US rate hike in nearly a decade. Hence, we except LME Nickel prices to trend lower towards 9200/tonne levels (CMP: 9880/tonne) and MCX Nickel to decline to 620/kg by Dec’15 (CMP: 657/kg).
With scanty rains across the country and crop failures at various locations which are the most active in the spices segment for trade for the last three months of calendar 2015?
As per the, Met Department, the rain deficit during current monsoon has fallen back to 14 per cent despite late surge over southern peninsular India and parts of North-West regions. This deficit may affect the Rabi sowing. Among spices, turmeric and Jeera (Cumin) may be the most active commodities for trading in next three months in 2015. Now since the monsoon is finally withdrawing from north-west and adjoining central India, the deficient soil moisture may affect jeera sowing while the turmeric crop has already received much-awaited showers during second half of September.
The price of jeera, which is a Rabi crop, has been in down trend recently on limited buying by the traders due to weak export orders. Currently, jeera from Syria and Turkey dominated the world market in September-October. During the next three months, Jeera supply is expected to remain tight as the last year production estimated were down by 42 per cent in Gujarat. Thus, prediction of lower stocks holdings for the good quality jeera with stockists may surge up the prices in near future as new crop will come next March-April. However, progress of jeera sowing in Gujarat and Rajasthan coupled with the export demand may keep the prices at higher levels. In case of turmeric, the prices during the monsoon season have surged to Rs 9,000 per quintal during the first week of September from Rs 7,500 levels due to reports of moisture stress and slow sowing progress in Karnataka, Telangana and Maharashtra. However, the prices have pulled back to Rs 7,800 levels during the second half of September on revival of rain in southern peninsula. In the coming months, turmeric prices are expected to trade on negative bias, on expectation of good production this year. However, expectation of good upcountry and export demand may keep supporting the prices at higher levels as farmers are anticipating good quality turmeric this season which may fetch higher prices.
The Indian rupee has been weakening against the US dollar and is trading near Rs 66 levels to the US currency. What levels do you see for the rupee in case of rate hike by the US Federal Reserve?
In spite of recent disappointing data releases, the overall trend of the labour market and housing sector shows drastic improvement. However, troubling external factors such as Yuan devaluation and plunging oil prices stood in the way of the FOMC’s rate hike decision (September). The US Central Bank kept the federal funds target range unchanged at 0-0.25 percent .They pointed towards an uncertain outlook for global economic growth and hinted towards a rate hike by the end of 2015 provided it is reasonably confident about the nation’s labor market and inflation rate. The Federal Reserve Chairwoman has kept a hawkish tone in all her speech and has warned the markets to be prepared for a possible rate hike by December. This will act as a negative factor for the emerging market economies as investors will shift towards US for investments which will result in huge outflows and will weaken the Indian Rupee. However, the recent rate cut of 50 bps by the RBI along with new proposals and projects undertaken by the new government will attract huge inflows thereby stabilizing the overall economy. Moreover, the Reserve Bank of India has sufficient reserves to keep the Indian Rupee supportive. Due to all the above factors, the Indian Rupee is expected to depreciate to 68.20 levels if the US rate hike happens in the near future.