Stepping on to the new territory of opportunities in commodities

by- Sugandha Sachdeva | AVP & Incharge- Metals, Energy & Currency Research at Religare Securities Limited 

An eventful 2015 has gone by leaving behind a trail of turbulences for commodity prices. Commodity market painted its canvas in red color during 2015, as most of the hard commodities languished and witnessed one of the most challenging year since the Great Recession of 2008.Concerns of a rate lift off in the U.S, Greece fiasco and China stumbling in the lap of slow growth dominated the show along with the mighty dollar.The U.S Fed’s rate hike and expectations preceding the same underpinned the dollar for most part of the year. Dollar witnessed a compelling upside momentum against other majors which led to losses in widely traded dollar quoted commodities. Bullion lost shimmer, while crude oil pummeled by 26 percent in domestic markets. Nickel got the worst thrashing to remain the nastiest player amongst base metals, dropping almost 40 percent while lead bucked the trend to end almost flat for the year. OPEC continued producing crude at elevated levels, while oil demand in China and Europe remained grim. This kept oil prices under pressure for most of the time during the year. Thanks to the depreciation in Indian rupee last year which kept losses in these counters under check at domestic bourses.

Gold prices ended on a negative note for the third consecutive year as the U.S Fed, after tracking crucial macro-economic factors for an elongated period, finally raised interest rates by 0.25 percent. Being a non-interest bearing asset, gold generally loses sheen in an environment where rates are rising and the losing streak in gold echoed the same theme. Sharp surge in dollar also hammered gold prices. Dollar reached around 13 year high against a basket of currencies as the U.S economy strengthened and the unemployment rate in the country descended. ETF holdings for the yellow metal fell to a seven year low, hurting the investment appeal of gold. For the last six years, China did not disclose anything about its gold reserves but surprised markets in July 2015,by announcing its holdings of the metal to have risen by more than 50% since 2009 to 1,658 metric tons.

Copper witnessed the worst rout in years as prices at LME fell to six-year lows, while at MCX prices were knocked down by twenty percent. Chinese Yuan’s devaluation signaled government’s heightened concern over the state of the economy all on back of poor stream of economic data. This again had a negative impact on prices. Fed’s rate hike also made industrial metals look less attractive. Nickel tumbled around 40 per cent in 2015, on account of weak global economic scenario and lower demand clubbed with higher supply.

WTI crude oil prices began the year on a promising note and touched a high of Rs.3989/bbl(NYMEX: $62.58/bbl) in May’15, but started plunging thereafter to reach a low of Rs.2276/bbl at MCX and $34.29/bbl at NYMEX. Prices tumbled by more than 30% at NYMEX while they are down more than 60 percent since June last year, as concerns over a supply imbalance weighed on the commodity. Prices tested six year lows with supply glut continuing to prevail for the entire 2015, making it one of worst year for the energy counter.

The dawn of New Year brings new trends, new statistics, new outlook and an array of opportunities. Like every bad story has an end, signs of Chinese economic recovery, robust advancements in the U.S growth and resilience in the Eurozone may anchor support for a revival in commodity prices in the year ahead. Crude oil prices seem nowhere scraping the bottom at least for the near term though overall demand supply dynamics might change as the year progresses and may turn out in favor of bulls as oil supply squeezes from OPEC or non-OPEC teams and demand gradually starts picking up. Prices may witness some more heat, but Rs.1900 per barrel($29/bbl at NYMEX) may take shape as a turning point from a long term perspective. Natural Gas prices are showing some signs of bottoming out after testing multi year lows with strong cushion at Rs.99 per mmbtu mark and look to witness a retreat from lower levels. Gold is expected to take cues from the pace of the U.S rate hike, while demand and import duty in India will play a crucial role going forward. In international markets, prices may drift lower towards $1000-980 per ounce, but the level of Rs.24400 per 10gm is likely to be respected in domestic markets. The actual signs of demand or further supply cuts will bring first ray of sunshine for base metals where lead is expected to outperform other industrial metals, as long as it holds above Rs.100/kg mark. Having said, trader and investor fraternity can look for bargain hunting opportunities at lower levels, provided the existing price dampeners turn weedy and positives outstrip negatives on the global macroeconomic front.

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