Crude rally hits a wall, gold shines

Oil gains curbed by weak Chinese demand

Crude’s rally came to a screeching halt overnight after WTI tested the USD70 level and as China’s imports dropped to a five-month low.  The weakness in Chinese demand appears to be more of a story about China’s private refining sector tentatively slowing purchases as they deal with investigations to address structural overcapacity.  China’s economic recovery is moderating but is still strong when compared to the rest of the world.  China’s May trade data showed imports had the fastest pace in a decade as the demand for raw materials remains elevated.

The energy market remains fixated over the Iranian nuclear deal talks with both sides doing a lot of posturing.  US State Secretary Blinken noted that it is unclear whether Iran is prepared to do what is necessary to come back into compliance with the Iran nuclear deal.  IAEA Chief Grossi voiced concern that Iran is hiding nuclear material and that he is ‘deeply concerned’ with Iran’s lack of engagement.

At some point this week, a make-or-break moment will present itself over Iranian nuclear talks and that should help determine if bullish momentum continues to send oil much higher.  Both sides are incentivized to get a deal done, but if a breakthrough does not occur before the June 18^th Iranian presidential elections, Brent crude could easily rally above the USD75.00 level.

Gold

Gold prices shrugged off earlier losses that stemmed from US Treasury Secretary Yellen saying that President Biden’s USD4.0 trillion spending plan would be good for the US, even if it contributed to rising inflation and results in higher interest rates.

If financial markets are already in the summer doldrum mode, that could mean gold prices could steadily rally over the next couple of months.  Even if the upcoming inflation report later this week doesn’t show a significant deceleration in pricing pressures, it probably won’t change anyone’s opinion on inflation at the Fed.  The May reading is expected to increase by 0.4%, a big drop from April’s 0.8% gain, which was the largest monthly gain since 2009.

Wall Street should see investor demand improve for safe-havens such as gold, as global tax and inflation concerns intensify.  Gold faces short-term resistance at the USD1,925 level.

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