Don't expect high volatility during oil F&O contracts expiry like seen in April

Tapan Patel

Commodity prices witnessed buying across the broad with bullion and crude oil prices trading higher while base metals ended lower for the week maintaining range-bound trading. All non-agro commodities are trading in positive on May 18 on signs of demand recovery with precious metals gaining on safe-haven buying.

Bullion prices continued upside with spot gold prices at COMEX ended more than 2 percent higher at $1,741 per troy ounce after breaking previous resistance at $1,747.74. Gold prices traded above $1,760 on May 18 to the highest levels since October 2012 as investors continued the safe-haven buying amid gloomy economic outlook. Silver prices outperformed gold in the previous week as COMEX spot silver prices rallied by 7 percent on technical breakout on charts. The positive economic data from China has spurred buying in Silver as cheaper in Gold/Silver ratio gave an advantage to silver on signs of demand recovery in industrial metals. Silver prices are trading nearly 5 percent up today with break out above $17.11, next resistance for silver lies at $17.70 and $18.70.

Crude oil prices rallied for the third consecutive week on supportive fundamentals. The benchmark NYMEX WTI crude oil prices traded higher on May 18 by 9 percent at $32 after rallying 19 percent in last week. The output cut effects from major oil producers and signs of demand recovery with ease in lockdown measures has supported crude oil prices to trade higher. The US crude oil and natural gas rigs count has hit all-time lows as many of US energy firms have shut productions which has eased supply pressure at physical delivery point at Cushing, Oklahoma. The NYMEX WTI June contract is set to expire on 19th May 2020 where many traders are expecting high volatility in the prices. However, we do not expect the previous expiry like situation this time as many traders have opt for early rollover to next contract. The sustainable trade above $30 a barrel may lead WTI crude oil prices towards $38 a barrel in short term, with strong support at $27 a barrel.

Base metals complex is struggling to join the rally like precious metals and crude oil. Prices are witnessing rangebound trading since a month on mixed global cues. The stable situation in China and ease in lockdown measures in many countries have supported base metals prices to form a temporary bottom. However, the concerns over the growth of demand recovery has kept upside limited in base metals. The fresh spat on COVID 19 blame between US and China has raised fears of another trade war after US banned supply of microchips to Huawei drawing retaliation from China. The recent rise in China's industrial output and new home prices has supported base metals to trade higher today with Copper and Nickel rallying by more than 1.5 percent followed by Zinc, lead and Aluminium with 1 percent of gains. MCX Copper prices have formed temporary bottom at Rs 345 while prices are expected to trade in the broad range of Rs 395 to Rs 415 in near term.

The author is Senior Analyst (Commodities) at HDFC Securities.

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