Oil hits 6-year high, gold rallies

Oil extends rally

OPEC+ drama is the icing on the cake for the rally in crude prices that is widely supported on an improving global economic recovery.  Everyone knows that the OPEC+ experiment wouldn’t last forever, but this somewhat surprise move by the UAE is just a smart posturing on their behalf.  It doesn’t make sense just yet for the UAE to leave the cartel, but they sure are getting ready for the eventual battle for market share.

Now that everyone expects crude prices to rise, the question is will Brent crude find resistance at USD85 or even the USD90 level.  An agreement could still happen in a week or two, but that uncertainty might be enough to support another surge in oil prices.  While the decision to keep output unchanged is what the current agreement says, no one should believe that OPEC+ members won’t start increasing output.

The oil market is heading toward a deeper supply deficit and that is supporting the kingdom’s decision to raise prices strongly.  Saudi Aramco lifted the official selling price for Arab Light crude by 80 cents a barrel to USD2.70 above the Oman/Dubai average for Asia, the largest monthly increase since January.

Crude prices turned negative as bullish bets became overcrowded and as optimism remains that OPEC+ will work this out and not allow the market to get too tight.

Gold

Gold prices are valiantly fighting off a potential death cross as stubbornly low Treasury yields shows steady flows boost sentiment for the precious metal.  For gold prices to continue rebounding, it needs to survive the upcoming Fed minutes that will most likely confirm their hawkish tilt.  Taper discussions are intensifying and that should drive a stronger dollar that could be a drag on gold prices.

After a disastrous June, gold is stabilizing but the downside short-term risks remain as the oil price spike is driving inflation concerns.  The long-term outlook for gold is still bullish as the low interest rate environment will likely remain in place over the next couple of years.  The 10-year Treasury yield has probably peaked for the remainder of the year and that should provide a friendly environment for gold to eventually recapture the USD1,900 level.

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