Oil falls, gold continues range-trade

Oil prices edge lower in Asia

Oil prices tumbled in Asia yesterday morning but managed to recover some of their losses throughout the rest of the day. Nevertheless, oil still recorded a substantial loss for the session. Brent crude finished 4.0% lower at USD 110.00 a barrel, while WTI finished 4.75% lower at USD 104.40 a barrel, with the Brent premium over WTI widening substantially. In Asia, oil prices have started moving lower once again, Brent crude and WTI losing 1.10% to USD 108.90 and USD 103.20 a barrel respectively.

Looking at the respective futures curves, both Brent and WTI are still heavily in backwardation, suggesting that prompt oil supplies remain as tight as ever, even as prices across the curves fall. Increasing recession fears appear to be prompting a culling of heavy speculative long positioning in both contracts, even as in the real world, energy tightness is as real as ever. WTI’s underperformance can be laid at Powell’s overnight comments, President Biden calling for a suspension of federal fuel taxes, and the surprise jump to 5.6 million barrels by the overnight US API Crude Inventories.

Still, even the US API number didn’t provoke a heavy negative response. Part of this could be that the US issue isn’t enough crude, it is enough crude refining capacity, which is running at an unsustainable 96.0% across the country already. If the official US Crude Inventory number jumps like the API one tonight, WTI may come under more sustained selling pressure than Brent crude, though.

The technical picture is interesting. Brent crude tested its 100-day moving average at USD 108.45, and the 2022 support line at USD 107.30 overnight but managed to bounce back to USD 110.00 a barrel. It may only be a reprieve though as oil prices start moving lower in Asia once again. A daily close under USD 107.30 implies a deeper move potentially reaching USD 100.00 initially.

WTI’s technical picture is much softer, having closed below its 2022 support line at USD 106.30, and its 100-DMA at USD 105.50 a barrel overnight. Failure of its overnight low at USD 101.50 could trigger a capitulation by speculative longs that moves WTI under USD 100.00 a barrel, although I suspect a lot of the damage has already been done.

How well oil performs tonight likely relies on how many times Jerome Powell says recession, and what the headline and gasoline stocks numbers are from the US Crude Inventories data set. I still can’t get past the heavy backwardation in both Brent and WTI futures contracts, which imply tight supplies in physical markets, something that makes complete sense when you look at its drivers around the world. Although I have never subscribed to the panic-mongering predictions of USD 150.00 and USD 200.00 a barrel of oil, I remain sceptical as to whether this is a structural turn in oil prices or just a culling of massive speculative positioning. As such, I believe for now, that oil will behave much like inflation, topping out as the year goes on, but not really falling by that much. A USD 100.00 to USD 120.00 a barrel medium-term range seems as sensible an outlook as ever.

Gold’s range continues

There isn’t much to say with gold, a slightly softer US dollar saw gold edge higher by 0.26% to USD 1838.00, while Asia has seen it drift 0.26% lower to USD 1833.00 an ounce, leaving gold in its usual nil-all draw. Admittedly, gold did trade in a USD 22.00 range overnight, but it is telling that it failed ahead of USD 1850.00 and finished almost unchanged once again. Until we get a material directional move by the US dollar, it seems unlikely that gold will sail out of the equatorial doldrums.

Gold has resistance at USD 1860.00 and USD 1880.00, the latter appearing an insurmountable obstacle for now. Support is at USD 1805.00 and then USD 1780.00 an ounce. Failure of the latter sets in motion a much deeper correction, potentially reaching USD 1700.00 an ounce. On the topside, I would need to see a couple of daily closes above USD 1900.00 to get excited about a reinvigorated rally.

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