Oil slumps as China struggles with COVID, gold remains volatile

Oil falls on China’s Covid outbreak

Oil prices headed lower as energy traders continue to price in further crude demand destruction as China’s covid outbreak worsens.  WTI crude knew it was in trouble given the deteriorating crude demand outlook, a stronger dollar, and after a senior US administration official said that President Biden did not make a “concrete ask” to India to ease up their energy purchases from Russia.

The oil market is getting beat up and it might take exhaustion from the strong dollar trade for it to stabilize.  Tomorrow’s inflation report could be key for commodity markets as it could potentially show the peak with inflation and trigger an end to this move with King Dollar.

The oil market is still vulnerable to a major shock if Russian energy is sanctioned, and that risk remains on the table.  China’s Covid situation will likely see growing resistance as these massive lockdowns are occurring as severe illness cases remain extremely low, but changes to the zero-covid policy won’t happen for many months. Oil prices will play tug-of-war here as crude inventories remain low, but energy traders will struggle to shake off these steady announcements of new Covid restrictions in China.

Gold

Gold prices have been on a rollercoaster ride as inflation and growth concerns lead to safe-haven flows that also coincide with a stronger dollar.  Gold was having a strong start to the trading week but exhaustion settled in as expectations remained high that another hot inflation report could continue to send the dollar higher in the short term.  The bond market selloff might continue leading up to the March inflation report, but afterwards if investors are confident the peak is in place, gold could be free to rise again.

Gold should continue to see strong inflows as uncertainty over inflation and growth will remain elevated over the coming months due to geopolitics and differing views on how aggressive the Fed will need to be with tightening of monetary policy during the summer months.

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