Momentum in crude oil looks positive; volatility may remain high ahead of contract expiry: Ravindra Rao

Ravindra Rao

Nymex crude has surged over 4 percent to trade above $30/bbl level for the first time since mid-March. Crude surged to 2-month high today after a sharp 19 percent rally last week. The current June contract is set to expire this week and in contrast to the subzero trade seen around expiry of May contract a month back, prices are trading firmly currently. The change in situation is due to expectations of a tighter market, however, uncertainty will persist until the contract expires.

Crude oil has benefitted from increasing efforts to reduce the glut in the market. US crude production has fallen to July 2019 lows while stocks fell last week for the first time in sixteen weeks. Drop in rig count also shows weakening production interest. The number of rigs drilling for crude oil fell by 34 rigs to 258 rigs, the lowest since July 2009.

Along with the US, OPEC and allies are also working on reducing output. Apart from the 9.7 million barrels per day cut by the group, Saudi and some other members have indicated the possibility of additional cuts. After days of consolidation, crude oil has edged up while a break above $30/bbl has led to extended gains. While the overall momentum looks positive, volatility may remain high amid positioning ahead of contract expiry.

Ravindra Rao

Head - Commodity Research|Kotak Securities

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Comex gold has risen over 0.5 percent to trade near $ 1,765/oz after a 0.9 percent gain in the previous session. After days of range-bound movement in the $1,680-1,750/oz, gold has edged up while a close above $1,750/oz has led to extended gains.

Gold has edged up on increased US-China tensions while concerns about the health of major economies have kept expectations high that more measures may be needed. US economic data released Friday was mixed highlighting the negative impact from the virus-related restrictions.

Meanwhile, Fed Chairman Jerome Powell said a US economic recovery may stretch deep into next year and a full comeback may depend on a vaccine, while he outlined the likely need for three to six more months of government financial help for firms and families. ETF inflows also show robust investor interest.

Gold holdings with SPDR ETF rose by 9.065 tonne to 1,113.78 tonne, highest since April 2013. Gold may continue to trade with a positive momentum unless there is an improvement in the virus-related situation or easing of US-China trade tensions.

Comex silver has risen about 3 percent to trade near USD 17.5/oz after a sharp 5.7 percent gain in the previous session. Silver has benefitted from firmness in the gold price and stability in industrial metals. Sharp ETF inflows also show robust investor interest. Silver holdings with iShares ETF rose by 260.95 tonne to 13438.2 tonne, a record high level. Also supporting silver price are supply concerns as Mexico considers delaying reopening of the mining sector.

The spot gold-silver ratio stands near 103 levels well off the highs of 125 set in March. Silver has underperformed gold for the most part of the year however we are now seeing a correction in gold-silver ratio and this has led to extended gains in silver. With firmer gold price and stability in industrial metals, the outlook for silver seems to have improved while investor interest remains firm. Silver may continue to trade firm unless we see a break in gold’s upward momentum.

The author is VP- Head Commodity Research at Kotak Securities

Date: May 19