Oil rally continues, gold retreats on Yellen

Oil markets gush higher

If equity markets were showing Yellen-induced rate nerves, oil markets were not. Both Brent crude and WTI rallied impressively for the second day in a row. Although oil rallied on a much weaker US dollar on Monday, it also rallied strongly even as the US dollar rallied powerfully overnight. That suggests to me that upside momentum is building for oil prices after Friday’s month-end hiccup.

A few factors are supporting prices at the moment. The US API Crude Inventories collapsed by 7.7 million barrels overnight, pointing to a drop in official Crude Inventories and Gasoline stocks tonight as the summer driving season gets underway. The constant stream of reopening announcements in the US and the anticipated rising consumption are supportive, as are indications from Europe and the UK that inbound tourism will soon reopen to vaccinated visitors.

Oil markets are myopically focused on recoveries in the US and Europe, with OPEC+ production increases and India seemingly priced in. Oil prices will receive another boost from the first indications that India is seriously getting on top of its Covid-19 tragedy. A strong Non-Farm Payroll figure on Friday is likely to fan the recovery flames even more.

Overnight, Brent crude rose through USD68.00 a barrel on its way to a 2.70% gain to USD69.45 a barrel. WTI rose 2.55% to the top of its bullish channel at USD66.25 a barrel. Prices in Asia are unchanged with not profit-taking sellers evident, another indicator that upward momentum has materially strengthened.

Brent crude has support at USD68.00 a barrel with resistance at USD70.00 and USD71.50 a barrel. WTI has resistance at USD66.50, the top of its two-month ascending channel today. That is followed by USD68.00 a barrel. A close above USD66.50 signals further gains to USD71.00 a barrel in the weeks ahead from a technical perspective. Support is at USD64.30 a barrel and then USD63.00 a barrel.

Gold sets a bull trap

I warned yesterday that gold’s next directional move would be decided by a break of either USD1760.00 or USD1800.00 an ounce, with the price action in between, choppy, if volatile noise. To my surprise, especially with gold, I was entirely correct.

Having tested USD1799.00 an ounce in earlier trading, the Yellen rate rise comments saw gold stage an immediate retreat. Gold fell 0.85% to USD1778.509 an ounce, and no doubt breaking a few bullish hearts along the way. If nothing else, the price action overnight highlights another drum I have been beating, gold’s sensitivity to the prospect of higher US yields. Last night’s damage was done by a strengthening US dollar, just as it rose on a weaker one the day before, even as yields remained neutral. The underlying premise, though, was the prospect of higher interest rates.

With that in mind, a wise course of action is probably to either continue playing the USD1760.00 to USD1800.00 range or moving to the sidelines until Friday to wait for the post-Non-Farm’s fallout. Anything else is playing with fire.

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