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Will This Commodity Rebound Continue?

Trading Floor

Since touching multi-year lows at the start of the year, many commodities are now on a rebound. The strong rally in a few commodities such as oil, zinc, gold and soybeans gives the impression that the worst might be over and a new rally may have begun.

However, rising prices in industrial metals, oil, and precious metals at the same time can confuse traders. Let’s try to find the reason for the rise in each commodity and analyze if these rallies are likely to continue.

Crude Oil


(Click to enlarge)

The crude oil market, which was in a supply glut until the start of the year, tipped over into a deficit due to supply outages in Canada, Venezuela, Nigeria and Libya; which have removed more than 3 million barrels per day from the market.

Though crude pierced through the resistance area of $51 per barrel, it has since dipped back into it once again. A belief among the traders that the supply outages will not be restored in the near future could boost the rally to the next resistance level of $61 per barrel. However, if the traders find that the supply is being restored at a fast pace, and if the U.S. production shows signs of picking up, the rally may well stall at the current levels.

Zinc

(Click to enlarge)

Zinc is the best-performing industrial metal, rising more than 25 percent from its lows. It is buoyed by supply shortage concerns, as the LME warehouse inventories have seen a 24 percent decline since mid-February.

“If you’ve closed two of the three biggest mines in the world and Glencore has also cut production, certainly we’ll have nothing other than a deficit this year while LME zinc stocks continue to fall steadily,” said Wiktor Bielski, head of commodities research at VTB Capital, reports the Financial Post. Related: All New Cars To Be Emission Free In Germany By 2030

However, there are concerns that the rising prices will curb the Chinese physical demand. Technically, Zinc can rise up to $2500 a tonne, where it should find strong resistance.

Soybeans

(Click to enlarge)

Soybean prices have been on a tear since March of this year. A weakening dollar and prices at multi-year lows boosted demand from China, the largest importer of the U.S. beans. Bulls were encouraged further due to expectations of a delayed harvest in Argentina, the third-largest soybean producer, due to heavy rains. Bulls are encouraged by the La Nina weather pattern, which is likely to affect crops in the U.S. Midwest.

Technically, soybean is entering an area of resistance. The levels of 1190 to 1250 should act as a strong resistance.

Gold

(Click to enlarge)

Fears of a financial crisis has led to a bottom formation in gold. The failure of the various central banks in stoking inflation and inducing growth points to a crisis around the corner. This has encouraged large traders such as Stanley Druckenmiller and George Soros to place large bullish bets on gold. Related: Cheap Energy Storage Is Set To Undermine Fossil Fuels

Technically gold has a strong resistance at the $1300/toz levels, above which it can reach targets of $1400 to $1425/toz levels.

After a multi-year bear market in commodities, various short-term and long-term reasons seem to have lured back investors. The rise has been sharp, and further upside from the current levels will need supportive fundamentals. The easy money on these trades is over, so traders should be cautious on any new positions in the commodities.

By Rakesh Upadhyay for Oilprice.com

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