Oil rally continues, gold edges up

Oil continues to defy gravity

There are no signs of a correction in oil markets, with Brent and WTI rising strongly again overnight as oil traders go all-in on a vaccine-led recovery boosting demand. That hope versus reality premise is a hazardous one, with airline travel and increased economic activity not occurring spontaneously over one vaccine trial announcement. Nevertheless, momentum is strong, and if the thought processes of oil markets are not to be respected, the momentum has to be.

Helping the rally along have been comments in recent days that Russia and Saudi Arabia are prepared to “tweak” the OPEC+ agreement to support prices. US oil production is also forecast to fall more than expected in 2021. OPEC+ are likely to continue riding their luck after the rally in oil this week; frankly, they all need the money. More phase-3 trial results in the coming weeks will likely put a long-term floor on prices if they are successful. The contango in the oil futures curve remains as strong as ever though, suggesting that the sky is definitely not the limit for oil’s rally.

Brent crude rose an impressive 4.80% overnight to USD44.00 a barrel, an approximately 11.0% gain for the week. It has support at the 100-day moving average at USD42.70 a barrel. It faces challenging longer-term resistance in the USD46.50 a barrel region. WTI leapt by 5.0% overnight, climbing to USD41.80 a barrel for an 11.50% gain since Monday. It also faces stern longer-term resistance in the USD43.50 a barrel region.

Neither relative strength index is overbought for now, suggesting that there is room for both contracts to continue rallying. If it is too good to be true, it usually is. Investors should brace for more two-way volatility, even if the underlying trend points higher. Something at this stage, I am not entirely convinced about.

Gold rises modestly

After the breath-taking sell-off on Monday, gold found a few bargain hunters overnight, rising 0.85% to USD1877.00 an ounce. In the scale of the sell-off though, the recovery looks more like a dead-cat bounce. Gold has crawled higher to USD1879.00 an ounce this morning, with volumes muted due to the US holiday.

The mother of all whipsaws has crushed open interest, as well as spirits in gold. The price action on Monday suggests that gold remains vulnerable to more selloffs, especially if other pharma companies release successful phase-3 trial data. Gold prices are likely to climb slowly via the stairs but fall by jumping out of the 6th-floor window for the near future.

Gold has interim support at USD1858.00 an ounce, followed by the USD1840.00 an ounce region. Resistance appears at the 100-DMA at USD1900.00 an ounce. Long or short, investors will need a strong constitution and deep pockets at the moment.

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