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Wednesday, May 10, 2006

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Crude may soften; metals to remain strong

G. Chandrashekhar

Scope for further liquidation in oil position

Crude prices unlikely to fall below high-to-mid $60
Metals price seen volatile on thin liquidity
Precious metals positive on Iran N-standoff

Mumbai , May 9

Crude oil prices have adjusted sharply lower over the past few trading sessions reflecting the partial liquidation of one of the largest speculative long positions ever seen in the crude oil market.

The selling pressure has emanated primarily from speculators who hold record net length. As per the CFTC data, the net non-commercial position in NYMEX crude oil futures hit an all-time high as of May 2.

The size of this position indicates that there is still a risk of liquidation over the week ahead, according to analysts with Barclays Capital who said the scope for further liquidation of this position suggests that short-term risk is to the downside in the week ahead.

However, prices are unlikely to fall much below the mid-to-high $60 a barrel level for WTI futures, analysts have warned, adding that the market also appears to be more relaxed over the US gasoline situation.

However, despite last week's move up in US inventory levels, concerns over shortages could resurface in coming weeks, pushing up gasoline relative to crude oil prices once again.

Metals' outlook positive

The outlook for prices remains extremely constructive, even as recent gains indicate very strong markets with prices supported by renewed inventory drawdowns amid supply short-falls and continued strong demand. Short-selling has also fuelled prices to the upside.

With prices trading higher so quickly, liquidity is also becoming thinner.

As a result, prices are likely to stay highly volatile. There is no obvious fundamental reason for prices reversing their overall up-trend anytime soon, analysts pointed out.

As for copper, the small net short fund position suggests that overall price risk probably still lies to the upside. A further potential on the upside is seen because of a favourable combination of factors.

The overall environment of a weak USD/EUR, ongoing concerns over the Iranian nuclear standoff and rising inflationary fears are extremely positive for gold.

The large net long position in gold barely changed over the past week, even as the strong fund interest could have been further encouraged by recent estimates that de-hedging might have increased significantly in the first quarter of 2006.

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