Oil moving sideways, gold drops below 1800

Oil consolidation continues

Oil prices continue to move sideways, despite some decent intra-day volatility. In the bigger picture though, both Brent and WTI continue consolidating near the top of their recent ranges thanks to favourable supply/demand characteristics in both the physical oil market and firm natural gas and coal prices.

Brent crude finished the overnight session 0.10% higher at USD 86.10, while WTI rose 0.73% to USD 84.35 a barrel after US API Crude Inventories rose by less than last week. In Asia, both contracts have edged 0.35% lower to USD 85.90 and USD 84.05 a barrel.

Tonight’s official US Crude Inventory data looms as the next volatility point with stocks expected to rise by 1.9 million barrels. Attention will be focused on gasoline and distillate inventories as well, and sharp drops similar to last week could boost oil prices once again. Similarly, if stocks at the Cushing hub drop further, nerves over supply issues will increase as we head into the colder northern hemisphere months.

The technical picture still has the respective relative strength indexes in modest overnight territory which means a sharp correction lower to flush out speculative longs cannot be ruled out. However, as previously noted, I expect any sudden fall to be met with an equally fast rally. Brent crude has resistance at USD 86.70 and WTI at USD 85.40 a barrel. Trendline support at  USD 83.90 and USD 80.65 a barrel respectively and should be the limit for any downside correction. Only a daily close below those levels suggest a deeper correction is possible.

Gold’s retreat

Gold fell from above USD 1800.00 an ounce overnight, finishing the session 0.83% lower at USD 1792.00 an ounce. In Asia, its retreat continued as it falls 0.20% to USD 1789.15 an ounce, moving it back below the 100 and 200-day moving averages at USD 1789.20 and USD 1793.40 an ounce.

The price action is somewhat disappointing, and it appears that gold is struggling to maintain gains above USD 1800.00. It appears that despite longer-dated yields easing in the US, the rise of the short-dated yields and the flattening of the US yield curve is weighing on gold, as is the US dollar’s quiet, but firm strength this week. Notably, gold’s fellow supposed inflation-hedge, bitcoin, appears to be suffering a similar fate.

Investors may well be turning their attention to next week’s FOMC meeting now and looking past earnings. It is almost certain that a start to the Fed taper will be announced, and I do not believe this has been remotely fully priced by markets. US yields should start to move higher once again, as will the greenback. In this environment, gold will struggle to hold near USD 1800.00. A move above USD 1835.00 would be a powerful bullish technical signal, but my base case is that gold’s retreat resumes into next week.

Gold now has resistance ahead of USD 1795.00 and again at USD 1813.50 an ounce, its recent highs. Trendline support, a very nice line extending back to its USD 1720.00 low in late September, is now nearby at USD 1882.50 an ounce. Failure of USD 1780.00 therefore, likely signals deeper losses targeting USD 1750.00 in the first instance.

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