Silver prices to remain under pressure unless oil price declines: Analyst

Silver: Slightly up as crude oil retreats

Performance:

  On June 4, spot silver traded between $72.46 and $75.07. At the time of writing this article, the metal was trading with a gain of 1.5 per cent at $73.98.  Silver erased its losses to trade higher on Israel-Lebanon ceasefire news that fuelled Iran deal optimism, though it trimmed its gains due to doubts resurfacing over Israel-Lebanon deal.

Geopolitics and oil:

Israel and Lebanon agreed at the talks held at the State Department in Washington on Wednesday to implement a ceasefire deal that does not involve Hezbollah. Hezbollah, the Iranian backed group, which is not part of the Lebanese government, was not present at the talks. Initial ceasefire deal reached in April also did not include Hezbollah. As per the new agreement, backed by the United States, Hezbollah will cease firing on Israel and leave southern Lebanon. The Lebanese military will take full control of newly established "pilot zones" free of any non-state armed groups. Reportedly, Israeli troops have withdrawn from Southern Lebanon town.      However, as expected, Hezbollah rejected ceasefire deal and demanded complete exit of Israeli troops from Lebanon.  The US House passed a resolution Wednesday to block President Donald Trump from ordering further strikes on Iran. However, Congress faces several hurdles before it could force Trump to end hostilities.  US crude stocks held by companies fell by 8 million barrels last week, the eighth straight weekly decrease, and are now 3 percent below the five-year average. The US government also released 8 million barrels from the Strategic Petroleum Reserve last week, bringing the existing level near the low hit in July 2023 that was reached after the Biden administration tapped the supply in the wake of Russia’s invasion of Ukraine.  Oil prices fell on Thursday on Israel-Lebanon ceasefire, but downside remains limited unless US and Iran enter a formal deal to normalize the traffic through the Strait of Hormuz. Several oil executives have recently warned that rapidly depleting oil storages will lead to a spike in gas prices in none too distant future. At the time of writing, Brent oil was trading with an intra-day loss of 3 per cent at $94.75. 

 

   

Data and events roundup:

 

US initial jobless claims jumped from 215,000 to 225,000 (forecast 212,000) — highest since the Iran war began — in the week ending May 30, though continuing claims fell from 1,785,000 to 1,777,000 (forecast 1,780,000). Unit labour cost at 1.8 per cent in its final reading was way cooler than the expected 2.4 per cent and prior 2.3 per cent. The Institute for Supply Management’s services index rose to a three-month high of 54.5 (forecast 53.80, prior 53.60) as new orders and business activity both increased. It is to be noted that other data released this week, like ISM manufacturing, Job Openings and Labor Turnover Survey (JOLTs) job openings and ADP data, have also been quite encouraging. 

 

Federal Reserve rate hike probability:

 

Overnight futures rates show that the US Federal Reserve is expected to hike rate by full 25 basis points by March 2027.

 

ETFs:

 

Total known global silver ETF holdings stood at 788.43 MOz, down 8.58 per cent (2,302 tons) year-to-date (YTD). Holdings have declined 1,392 tons since the Iran war broke out in February-end.

 

Silver lease rate:

 

One-month London Bullion Market Association (LBMA) lease rate at 0.4% does not betray any supply concerns as it is within the historic range.

 

Shanghai Silver inventory and price:

 

Shanghai Futures Exchange on warrant silver inventory stands at 972.90 tons, sharply up from 252 tons seen on March 11, though largely the inventory level is hovering at a ten-year low.

SHFE silver is trading at a premium of nearly 10 per cent over London Bullion Market Association (LBMA) silver.

 

Outlook:

 

Strong US data, uncertainty over Hormuz and rate hike concerns are bearish for the white metal. ETF holdings continue to fall as investors fret over rate hike possibilities. 

In near-term, the metal is expected to be under pressure unless oil prices come down on sustainable basis.

A test of support at $69 is quite possible. Resistance is at $76/$80.     

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(Disclaimer: This article is written by Praveen Singh, head of commodities, Mirae Asset Sharekhan. Views expressed are his own.)