Oil soars, gold continues to drop

Oil achieves near-earth orbit

Oil prices raced higher overnight, something which has caught the author off-guard. With an orderly Presidential transition in sight, vaccine boosters and expectations that OPEC+ will extend production cuts next week, oil markets completely ignored the unexpected 3.8 million-barrel climb in API US crude Inventories. Brent crude soared 4.45% to USD47.80 a barrel, and WTI rocketed 4.55% higher to USD44.80 a barrel.

The rally has continued in Asia, with Brent crude climbing 1.30% to USD48.45, and WTI rising 1.40% to USD45.40 a barrel. The exuberance seen in oil markets overnight has wrong-footed me in all honesty; the markets have rallied in one session, what I thought they would take a week to do at best. That does suggest that a lot of fast money has piled into the market overnight, as the CFTC Commitment of Traders clearly shows that the institution market had been long futures for some time already.

The aggressive narrowing of the Brent crude contango in the calendar spreads is undoubtedly playing its part. The spread has narrowed now to levels that make the cost of carrying to store oil for sale in the future uneconomic. That is a warning sign in itself, that a lot of oil in storage may now start appearing on global markets in volume, potentially capping prices. Also, OPEC+’s capacity to squabble and disappointment knows no bounds and is a definite risk into next week.

The most significant warning sign though is the respective Relative Strength Indexes (RSI) on both contracts. Both are now entering extremely overbought territory. Oil could continue rallying for another few days, but bitter experience indicates that the longer the RSIs remain in extreme territory, the more vicious the correction usually is.

From a technical perspective, Brent crude has no resistance until USD53.00 a barrel, with support at USD47.80 and then USD45.00 a barrel. WTI has no technical resistance until USD48.50 a barrel, with support at USD44.80 a barrel, and then USD44.00 a barrel.

The short-term need for greed may have seen oil markets get ahead of themselves after last night. I will not dispute the merits of higher oil prices if the global recovery accelerates and OPEC+ cap production. The Monday OPEC meeting is a risk though, and the short-term technical indicators are shouting warning signals, traders should tread carefully at these levels, least black gold becomes black mould.

Gold’s heartbreak continues

The Biden transition vaccine powered rally into recovery positioning in other markets added up to more pain for gold overnight. Havens have been hammered, and none worse than gold. Overnight gold fell 1.65% to USD1807.50 an ounce and is now nearly 80 dollars lower for the week. There has been no respite this morning either, with Asia pushing gold another 0.30% lower to USD1802.50 an ounce.

The price action suggests that many medium, as well as short-term longs, are now throwing in the towel. Although the US dollar has weakened, the real culprit is the steepening of the US yield curve. Gold is extremely sensitive to higher US rates, and if bond yields from 10-years out continue rising, gold will have more pain ahead.

Although the US dollar debasement story is a valid one, and I believe it will come into play for much of 2021; more shorter-term pain for gold longs seems likely, especially if ETF gold trackers suffer large outflows. The FOMC meeting in December will announce more easing and may well bring in some sort of yield control programme, which will give gold some respite. Until then, the global rotation into recovery positioning will cap gold prices.

Gold is just above critical support at USD1797.00 an ounce, the 200-day moving average. A weekly close below this level would be a very negative technical signal. A loss on a weekly basis target further falls to USD1670.00 an ounce. Gold now has formidable resistance at USD1850.00 and USD1900.00 an ounce.

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