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Informist, Thursday, Aug 22, 2024

 

By Sandeep Sinha and Sayantan Sarkar

 

MUMBAI/NEW DELHI – If the Organization of the Petroleum Exporting Countries and allies go ahead with their plan to unwind the voluntary production cuts from October, crude oil prices could slip below $70 per barrel, said Vandana Bharti, associate vice president, head of commodity research at SMC Global. However, this may not happen anytime soon, she pointed out.

 

"OPEC is in no position to go for the production cut unwinding because it will lead to crude prices falling to $67-$68 (per barrel), which is not viable for the cartel members," Bharti told Informist in an interview. Whenever oil prices fall towards $70 a bbl, OPEC starts to opt for production cuts as they want prices above $75, she said. 

 

If prices oscillate between $70 and $74 per bbl, it is doubtful whether the OPEC will go ahead with their plan of unwinding the voluntary production cuts, Bharti added. "They will keep (production policy) mostly unchanged as per my expectation."

 

In June, OPEC and its allies had agreed to extend the 2.2 mln bbl per day of production cuts of crude oil till the end of September. The cartel said it will start unwinding these cuts from October through September 2025. The voluntary production cuts are on top of the long-standing output reductions of 3.66 mln bpd, which have been in place since last year. The 3.66-mln-bpd production cut, which was set to expire at the end of this year, has been extended till the end of 2025, according to an official statement.

 

Crude oil prices are driven by political developments surrounding OPEC, non-OPEC, and the US, and are not entirely dependent on demand and supply dynamics, Bharti added. As OPEC would not be comfortable with prices below $70 a bbl, this level will be a strong support for West Texas Intermediate crude, she said. On the higher side, WTI prices could attain the level of $78-$79 a bbl, according to Bharti. 

 

On the Multi Commodity Exchange, investors should wait for a further correction in prices towards 6,050-6,100 rupees per bbl to buy, and target a level of 6,450-6,500 rupees for squaring off their positions, Bharti said. At the time of writing, the price of WTI crude was $72 per bbl, while the September contract on MCX was 6,050 rupees a bbl. WTI crude prices have fallen from a high of $84 a bbl in July to around $73 a bbl currently due to concern over weak demand in China, the top importer of the commodity. 

 

PRECIOUS AND BASE METALS

Even as crude oil prices struggle to find a definitive level above the $80-per-bbl mark, gold has been red-hot this year so far. Bharti believes if the US Federal Reserve cuts interest rates by 50 basis points in September, gold prices could scale another lifetime high next month. Bharti expects gold prices on COMEX to rise to $2,570 per ounce in the next couple of weeks, while on MCX, prices could reach 78,000 rupees per 10 gm. Bharti said the year-end target for MCX gold prices has been revised to 75,000-76,000 rupees per 10 gm from 80,000 rupees earlier after the government cut the basic import duty on bullion to 6% from 15% previously. 

As for demand for gold from central banks, Bharti said an economic slowdown in China could result in the People's Bank of China pausing purchases of the yellow metal, and waiting for a correction. "But gold is very strategic, and they shouldn't wait for a deep correction in prices," she said. According to Bharti, gold prices on COMEX are not likely to fall below $2,000 per ounce, so a level around $2,380-$2,400 is also a very lucrative level for accumulation. "Central banks should wait for a slight correction, and then accumulate further."

 

Bharti also said investments in silver could be beneficial as the metal has constantly outperformed gold this month. "Silver is getting some green signals from the equity market and the economic front, and since this is also an industrial metal, it will continue to outperform gold," she said. On COMEX, silver futures could rise to $30 per ounce, while the most-active contract on MCX could see levels of 88,000 rupees per kg, she said. When asked if silver futures could hit 100,000 rupees per kg, Bharti said she doesn't expect the level to reach this year.

 

Among other metals, Bharti said she was more bullish on zinc as the market is facing a supply deficit. On MCX, zinc contracts could rise to 282–285 rupees per kg as the fundamentals support prices, she added. Currently, the most-active zinc contract on MCX is around 268 rupees per kg. However, she said any upside momentum in base metal prices will depend on China's economy. "Until we see some kind of improvement in China from the real estate sector, we do not see any kind of bull run in base metals, and if there is some kind of upside rally--every now, and then you can see a correction from higher side," Bharti said. "Stability at higher side in base metal is always questionable when China is not working well."

 

Additionally, Bharti said that the Indian government was in continuous talks with other countries to secure the supply of critical minerals to reduce the reliance on China and developed countries to fulfil green energy goals. Critical minerals have seen renewed interest from the government as it plans to increase mining activities and area limits granted to individual players. It has also amended laws to make mineral mining more lucrative in the country. 

 

COMMODITY DERIVATIVES & FUTURES BAN

When asked about the reason for lack of interest among foreign portfolio investors in commodity derivatives in India, Bharti said the exchanges should provide a liquidity enhancement scheme in commodities trading. The Securities and Exchange Board of India allows stock exchanges to introduce liquidity enhancement schemes to increase liquidity in illiquid securities. This encourages brokers to generate interest and liquidity in securities with limited trading activity. SEBI permitted stock exchanges to introduce liquidity enhancement scheme in the equity derivatives and equity cash segments in 2014. 

 

According to Bharti, rising inflation in food prices prompted the government to make a "scapegoat" by banning futures trading in essential commodities such as edible oils and pulses. Bharti believes hedging is already happening in spot markets, but it is banned in futures trading of these commodities. However, she said exchanges have urged the government to allow the resumption of futures trading in some of these commodities--chana, soybean, maize, wheat, mustard seeds, moong and paddy. Bharti is hopeful that the exchanges will allow re-launching soybean futures soon. 

 

Apart from soybean, the exchange must also allow trading in pulses as well. Despite a ban on trading in chana, prices have hit record highs in recent times. "If they launch (chana) again, the farmers can get cues about what to sow because earlier they were getting indications from the exchanges," Bharti said. Currently, farmers are clueless about which crops to invest in and which ones to avoid, she added.  End

 

US$1 = 83.96 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Akul Nishant Akhoury

 

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