Oil steady, gold extends losses

Oil consolidates

Oil prices finished almost unchanged overnight, with Brent crude closing at USD 78.45 and WTI at USD 74.70 a barrel. In a moribund pre-China holiday session, prices are unchanged in Asia.

Despite the narrow ranges, I note two important occurrences that suggest oil prices remain very well supported at these levels. Firstly, the mighty US dollar rally overnight did not dent oil prices by one iota. Secondly, US official Crude Inventories followed the API data and posted a surprise 4.50 million-plus gain in crude stocks. Once again oil prices did not move, as opposed to the drop the day before the API data caused. That suggests that the speculative long-covering that pushed Brent crude’s retracement of its highs above USD 80.00 a barrel may have run its course for now and that oil’s price action is far more constructive than the headline changes suggest.

The Northern hemisphere energy crisis isn’t going to disappear over the weekend, another underlying supportive factor. I also believe that OPEC+ will not be spurred into increasing their production targets next week at the JMMC meeting. The grouping has shown before that they are not reactive to short-term moves in spot markets. A China holiday from tomorrow for a week may take the heat out of the oil rally, but there are few reasons to suggest it is anything but a buy on dips.

Only a fall by Brent crude through USD 76.00 a barrel temporarily delays the bullish outlook while resistance lies at USD 79.50 and USD 80.70 a barrel. Similarly, WTI would need to fall through USD 73.00 a barrel to change the bullish outlook, while resistance lies at USD 75.70 and USD 76.70 a barrel.

Gold’s retreat continues

Gold continued its journey south overnight and given the strength of the US dollar on currency markets, I am surprised that gold only fell modestly. Gold finished the night 0.43% lower at USD 1726.50 after testing support at USD 1720.00 an ounce intra-day. In Asia, gold has risen 0.30% to USD 1732.00 an ounce as investors lock in some risk insurance ahead of the week-long China holiday.

Risk hedging, and if we are honest, there are plenty of reasons to want to have some at the moment, may well be playing a major part in taking the edge of the gold sell-off. However, gold still looks very vulnerable, and rallies have quickly dissipated.

Another bout of US dollar strength in US markets tonight could see gold test support at USD 1720.00 an ounce. After that, USD 1700.00 offers only psychological support ahead of the critical longer-term support zone between USD 1675.00 and USD 1680.00 an ounce. Failure of the latter could well set off another wave of investor liquidation and push gold, rather quickly, as low as USD 1600.00 an ounce. Above, gold still faces challenging resistance at USD 1640.00, USD 1660.00, and USD 1680.00 an ounce.

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