Oil down on IMF, gold whipsaws

IMF China forecast slams oil prices

Libya’s production and export issues have been quickly forgotten as the IMF belatedly lowered its forecast for China’s GDP this year, citing Covid-zero challenges amongst others. Lower China growth equals lower oil consumption in the simplistic minds of day traders, and oil prices duly slumped. Brent crude fell by 4.60% to USD 107.50, and WTI slumped 5.0% to USD 102.60 a barrel.

In Asia, the material overnight fall in prices has proved too hard to resist for local buyers who have piled in to buy the dip. Brent crude has risen 0.65% to USD 108.20, and WTI has risen 0.80% to USD 103.40 a barrel. Both contracts continue to suffer from illiquidity in the futures markets as high volatility and raising margins impact volumes, magnifying intraday ranges.

With so much volatility in intraday oil prices, and extreme reactions to headline risks, technical levels have become rather irrelevant. Overall, therefore, I continue to expect that Brent will remain in a choppy USD 100.00 to USD 120.00 range, with WTI in a USD 95.00 to USD 115.00 range. Brent crude has further support at USD 96.00, and WTI at USD 93.00 a barrel. The start of the second Russian offensive in Ukraine is set to lift price volatility even more.

Gold’s whipsaws fast money long positions

Gold prices slumped by 1.50% to USD 1950.00 an ounce overnight, easing another 0.30% to USD 1944.00 in Asian trading. The price fall has been blamed on rising US yields and US dollars overnight, but this position is irrational given that gold has happily rallied in similar conditions over the past week.

A much simpler and far more likely reason is that the fast money traders who bought gold for the test of USD 2000.00 have been squeezed out of their positions. Gold fell short of a material test of USD 2000.00 an ounce earlier this week, with gold peaking at USD 1998.50 an ounce. The fall through USD 1970.00 triggered stop-loss selling of those positions, pushing it lower in one-way price action to USD 1950.00.

Gold still looks vulnerable and failure of USD 1940.00 could see more speculative long positions getting culled and gold falling to USD 1915.00 an ounce. However, gold’s price action of the past few weeks has been quietly signalling those risks, be they inflation or geopolitical, have been increasing. Nothing I can see has changed that fact, and thus, the correction lower could be an opportunity to load up again at much better levels.

Gold still has resistance at USD 2000.00 an ounce, and I believe option-related selling there will be a strong initial barrier. However, if USD 2000.00 is cleared, gold could quickly gap higher to USD 2020.00 an ounce quickly, and potentially, retest USD 2080.00 an ounce. Failure of USD 1915.00 will signal a retest of important support at USD 1880.00 and possibly USD 1800.00 an ounce. The question is whether the overnight fall is a short-term correction, or something larger.

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