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Crude oil prices may test $37-38/ barrel in the near term

The markets witnessed an eventful week as the MCX market-wide turnover rallied 19% (the previous week was shorter by a session), and open interest was higher by 13% on the MCX. The turnover gainers were aluminium, crude oil, gold, natural gas and nickel. Open interest gainers were aluminium, copper, crude oil, natural gas and nickel. The recent promise seen on the base metals space gave way to a rout, as US economic data turned negative beyond expectations and bulldozed prospects of a price recovery. The fall was broad-based as soft and hard assets plummeted in unison. Gold, which was the last bastion of the bulls, also gave way on Friday. This week can see a relief rally at best and the outlook in the near term is that of overhead supply. Avoid bottom fishing.

Agri commodities
Mentha oil has turned weak and will witness a reversal in fortunes only after it trades above the Rs 530 levels consistently on heavy volumes. Near-term support will be seen at the Rs 490 levels. Take a call once any one of these thresholds is overcome. Market internals indicate a 12% decrease in turnover and a 7% decline in open interest.

Metals
Aluminium has recorded a steep decline which has taken it to the lowest level since listing on the MCX. The decline in the US housing markets and worldwide contraction in construction activity are likely to keep the commodity subdued. Upthrusts will be selling opportunities and bottom fishing may be avoided in the near term. Market internals indicate a 107% increase in turnover and an 86% increase in open interest. These are indicators of a fresh short build-up.

Copper has closed below the week ended September 24, 2005, levels and that is an indication of the selling pressure witnessed on this counter. The Rs 175 level will act as a resistance for short-term players. The demand destruction from the construction industry will keep prices subdued in the near term. Lay off purchases for now. Market internals indicate a 7% increase in turnover and a 92% increase in open interest. These are indicators of a fresh short build-up.

Gold has fallen below a support after closing below the Rs 12,300 mark. The outlook will turn even more bearish if the yellow metal trades below the Rs 11,750 levels consistently. The supports then will be at the Rs 11,400 and Rs 11,150 levels. Fresh buying may be avoided for now. Market internals indicate a 23% increase in turnover and a 27% decline in open interest.

Nickel is precariously poised on the threshold of a decline below the Rs 450 mark. A sustained trade below this threshold with higher volumes and open interest expansion will signal a decline that may be sharp.

The Rs 530 levels will see a hurdle at the Rs 535 levels which needs to be overcome to signal a fresh buy. Market internals indicate an 18% increase in turnover and a 39% increase in open interest.

Silver is likely to witness a ‘last mile’ support at the Rs 16,000 mark below which the precious metal can shed Rs 500 points rapidly. Watch the volume and open interest expansion during this price move and initiate shorts if the velocity of the fall is high. Bulls will get relief only above the Rs 16,700 levels. Market internals indicate a 6% increase in open interest and a 31% decline in open interest.

Zinc has seen a reversal in direction as this outperformer too has succumbed to market forces. The erstwhile support at Rs 52.50 is likely to be tested and the Rs 58 level will be a stiff resistance in the coming sessions. The outlook will be bearish as long as the base metal peers are under pressure. Avoid initiating fresh longs until a forceful breakout is seen. Market internals indicate a 5% decline in turnover and a 1% decline in open interest as bulls unwind longs.

Energy
Crude oil has closed at its lowest since week ended February 12, 2005. The sharp weekly drop is despite the margin drop in US inventories and that sums up the near-term outlook on this commodity. The Rs 2,500 level will act as a stiff short-term resistance and unless this is overcome on high volumes, bulls should not contemplate fresh positions. The international price may test the $37-38 / barrel in the near term. A pullback may be seen after that. Market internals indicate a 28% increase in turnover and a 100% increase in open interest. These are indications of a fresh short build-up.

Natural gas has turned distinctly weak below the Rs 300 mark. The warmer winter is likely to see a contraction in demand for heating purposes. Negative economic data is adding to the expected demand. Upsides will see unwinding by bulls and oversupply needs to be absorbed before a buy call can be initiated. Market internals indicate a 45% increase in turnover and a 67% increase in open interest. These are indicators of a fresh short build-up.

Mandatory disclosure: The analyst has no exposure to any commodities mentioned above.

The author is a Mumbai-based investment consultant and invites feedback at vijay@BSPLindia.com