Oil concerns after a massive drop in US inventories; Sense of bullish calm returns to gold

Oil prices rose overnight, but not spectacularly so. Oil should have done much better after a massive fall in US Crude Inventories of over 10 million barrels, as well as the tailwinds from a generally much weaker US dollar. Instead, Brent Crude edged just 1.10% higher to USD43.70 a barrel, and WTI rose an even less than impressive 0.45% to USD41.40 a barrel.

Both contracts remain adrift in their tight one-month trading ranges, with their inability to rise on falling US oil stocks, or a weaker US dollar an increasing threat to their 3 1/2-month rally. It may well be that oil markets are pricing in a higher risk of an economic downturn in the US and places elsewhere due to Covid-19. It could also be the physical demand has already started peaking. Shale producers hedging production, even at these levels in a desperate race for cash could also be capping price rises. Whatever the reason, the longer that oil refuses to rally on underlying price supportive factors, the higher the risk of a potentially ugly downside correction.

Brent crude has resistance at USD45.00 a barrel, with WTI’s resistance now at USD43.00 a barrel, its 200-day moving average. Both need to make constructive progress at eroding those levels in the near-term to maintain the bullish case.

A sense of bullish calm returns to gold
Gold markets put the volatility histrionics of the past two days behind them overnight, with a suitably dovish FOMC and the ensuing weaker US dollar lifting gold prices. The return to a sense of normality saw gold push 0.70% higher to close at USD1970.00 an ounce.

Gold has edged lower to USD1964.00 in Asia, with the move looking very much like the profit-taking flows we are seeing in currency markets today. The underlying bullish case for gold remains intact. That is a liquidity-ready Federal Reserve, negative real yields across the US yield curve and a lower US dollar.

Gold though does now have resistance to overcome ahead of a test of the USD2000.00 an ounce region. It has traced out a double top at USD1981.00 an ounce, which will provide stern resistance to short-term rallies. Given the volatility of the past two days, initial support is now somewhat distant at USD1941.00 an ounce.

Although profit-taking is dominating price action in Asia, I expect upside pressures to resume once Europe and the US arrive at their desks.

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