Gold weakens, oil drops

Oil slide continues on EIA inventory surplus

Crude prices are declining for a fifth consecutive day as concerns grow that Europe won’t have a regular summer.  The crude demand outlook for the US appears to be the complete opposite for the eurozone.  Europe is seeing a third straight week of rising of COVID cases and with vaccination hurdles remaining in place, the outlook does not seem it will be getting better anytime soon.

The latest EIA crude inventory report indicated that crude inventories rose for a fourth straight week as refineries were forced to close owing to a cold snap. Inventories rose by 2.4 million barrels last week, disappointing the market. After the API data on Tuesday estimated a 1 million barrel draw, hopes had been running high that the EIA release would also show a draw, but this was not the case.

A strong dollar is emerging post-Fed decision as short-end rates appear anchored, while the long-end of the curve is free to rise.  A strong dollar is accelerating the weakness in oil prices.

WTI crude could soften some more, but should start to see buyers emerge around the USD60 level.  Significant weakness from here seems unlikely since the short-term hit to demand outlook should be temporary and OPEC+ production could stay steady for another month.

Gold

Gold prices have already given back all their ultra-dovish Fed gains now that bond market selloff has resumed.  Treasury yields are surging alongside that dollar and that is short-term bad news for gold.

While the Fed and BOE seem nowhere ready to begin tapering asset purchases, emerging market central banks are already launching interest rate hikes.  Inflation may not be hitting the advance economies, but they are with EM and that should be very positive for gold over the next few months.

Gold’s outlook will improve once ETF buying returns, but right now it seems that might not be happening anytime soon.

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