Oil bounces back, gold range-trading

Oil prices rebound

As expected, oil’s sell-off proved very temporary and oil prices rebounded sharply overnight. Brent crude rose by 2.0% to USD 82.45, and WTI leapt 2.50% higher to USD 78.85 a barrel, with no indications from the government that any reserves from the SPR would be released onto the market. The return of China mainland markets today has seen the rally continue, with both contracts 0.50% higher to USD 82.85 and USD 79.20 a barrel.

The Russian-inspired sell-off in natural gas prices has quickly come to a halt with prices steady overnight, as the markets digest the reality of the high in rhetoric, but low in specifics nature of the announcements. With China in the market “at all costs” for energy supplies and no instant magical panacea for Europe and the UK’s energy woes, the Russian announcements were never likely to have more than a transitory effect. By default, that will continue to support oil prices. Similarly, China’s announcement allowing inner Mongolia coal mines to ramp up production has had zero impact, emphasising that higher prices are the path of least resistance.

With the relative strength indexes (RSIs) on both contracts moving lower into neutral territory, oil prices now have plenty of room to continue rising from a technical analysis perspective. Brent crude has initial support at USD 79.50 but only a fall through USD 76.00 a barrel would alter the bullish outlook. Resistance is nearby at USD 83.50 a barrel, and a test of USD 88.00 a barrel cannot be ruled out next week. Likewise, only a fall through USD 73.00 would alter the bullish outlook for WTI. A rise through resistance at USD 80.00 a barrel opens the door for further gains targeting USD 84.00 a barrel initially.

I continue to expect any oil price sell-off to be short-lived given the physical demand out there on spot markets for energy. Likewise, I expect the US Non-Farm Payroll data to only have a short-term impact on prices, not a structural one.

Gold trades in narrow range ahead of US data

Gold prices held steady at USD 1755.00 overnight, rising slightly to USD 1758.50 an ounce in Asia this morning. The usual pre-weekend, pre-data risk hedging by Asian investors accounting for the modest price rise. Overall, though, gold remains confined within a narrow USD 1750.00 to USD 1770.00 an ounce range as it awaits the US Non-Farm Payroll data this evening.

Like other asset classes, the US data presents a very binary outcome for gold prices. Weak data should see gold rise back towards USD 1800.00 as tapering expectations are reigned in. Conversely, a strong number puts the Fed taper front and centre. US yields and the US dollar are likely to rise, and gold’s medium-term descent should resume.

Gold has initial resistance at USD 1770.00 an ounce, followed by USD 1790.00 and then the formidable USD 1800.00 to USD 1810.00 zone, containing the 100 and 200-day moving averages. Support lies at USD 1750.00 initially and strong US data should see gold retest support at USD 1720.00 an ounce. A weekly close below USD 1680.00 signals a much deeper correction is in place extending below USD 1600.00 an ounce.

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