Oversupply concerns likely to keep oil prices under pressure: Kotak Securities

Comex gold was trading mixed near $ 1,895 /oz after a 0.7 percent gain on November 2. Gold slumped to one-month low last week but managed to hold above $1,850 level and bounced back. The rebound is part of recovery seen across commodities and equities amid position squaring ahead of the US election outcome.

US DJIA index rose 1.6 percent on November 2 after a sharp 6.5 percent drop last week. Gold rose also as the dollar stalled after testing one-month high. Upbeat manufacturing data from major economies and stability in equity market reduced the dollar’s safe haven appeal.

Gold also benefitted from expectations of additional stimulus measures as rising virus cases challenge economic recovery. Last week, ECB indicated a possibility of additional measures in December and focus will now shift to the Bank of England (BoE) and Fed decision due this week.

BoE is expected to boost bond purchases to support the economy as the nation has imposed tighter restrictions to limit the virus spread, dampening economic activity.

The Fed is expected to keep monetary policy unchanged but focus will be on its future stance. While there is uncertainty about the outcome of the US election, if there is a new government with complete majority then possibility of a new fiscal deal may improve.

ETF outflows, however, show weaker investor interest in gold amid uncertainty ahead of the US election. Gold holdings with SPDR ETF fell by 1.8 tonnes to 1255.918 tonnes, the lowest since September 17. Gold has bounced back after taking support near $1850 but needs to sustain above USD 1,900 to regain its momentum. We expect choppy trade during the day as market players position for the US elections outcome.

NYMEX crude trades mixed near $ 37 per barrel after a 2.8 percent gain the previous day. Crude fell as low as $33.64 in intraday trade on November 2, the lowest since May but bounced back sharply and ended higher.

Crude has fallen sharply in last few days amid oversupply concerns as supply is improving from OPEC and US while demand outlook has been dampened by rising virus cases and restrictions imposed to limit its spread.

Crude started the week on a weaker note as the UK added to the list of European countries to impose stricter restrictions while a Reuters survey reported a fourth monthly rise in OPEC crude production and the US crude oil rig count rose for the sixth consecutive week to May highs. The sharp drop in price, however, fueled expectations that OPEC and alliance may intervene to help rebalance the market.

As per OPEC+ deal, the group is set for further tapering of its production cuts from January 2021. With weakening demand outlook and lower prices, market expectations picked up that the oil producer alliance may delay further reduction in production cut.

Crude bounced back sharply on November 2 as Bloomberg reports noted that energy minister Alexander Novak met with Russian producers to discuss delay an easing of production cuts by three months. Crude also benefitted from expectations of robust demand from China.

As per Bloomberg reports, Chinese authorities raised the quota for use of overseas oil by non-state entities next year by more than 20 percent. The rise in the import quota is equivalent to about 823,000 barrels a day.

Crude also benefitted from upbeat manufacturing data from major economies. China, Japan, the US, the UK and the Euro zone. Crude was also affected by volatility in financial markets as traders' positioned for US election.

While the election outcome may affect many policy decisions, in the near term, market is focusing on the impact on the US fiscal stimulus. Crude may witness choppy trade along with other commodities, we maintain sell-on-rise view amid persisting oversupply concerns.

Apart from the election, the focus during the day will also be on the US economic data, development relating to virus outbreak and possible comments from OPEC+ members on production policy.

The author is VP- Head Commodity Research at Kotak Securities