Oil rallies as Chengdu eases lockdowns, gold weakness continues

Oil rebounds as China relaxes Covid restrictions

Oil is rebounding as China begins to ease some of their COVID lockdowns. ​ The next major move in crude was always going to be triggered by the world’s biggest oil consumer and the loosening of lockdown restrictions should put a firm bottom in place. ​ In addition to Chengdu’s easing of COVID restrictions, the White House is debating when they should refill the Strategic Petroleum Reserve (SPR). ​ Crude prices seem poised to rally further now that the White House is focused on refilling reserves and not continuing to tap them. ​ China remains the key for oil and as long as the COVID situation doesn’t spiral out of control, oil should continue to stabilize here.

The oil market looks like it is still going to remain tight despite some of the weakening demand figures the EIA crude inventory report is telling us. The EIA crude oil inventory report showed weakening gasoline and jet fuel demand, while distillate stockpiles posted a big build. ​ Production is steady and that probably won’t be going up significantly from these levels.

Oil looks like it could quickly find a home above the $100 level, but it might struggle to extend from there. ​

Gold

Gold’s fate will be determined next week when policy makers decide if the Fed needs to be even more aggressive with fighting inflation. ​ The base case should still be for a 75 basis-point rate hike, but if the Fed delivers a full-point rise, that will be lights out for gold and possibly trigger a collapse for the precious metal. Gold could be vulnerable to a tumble towards $1650 and possibly much lower if the Fed signals more aggressive rate hikes remain on the table. ​

Gold is trying to steady as we won’t be hearing from any Fed members during the blackout period, which means we should start to see gold form a trading range as long as Fed rate hike expectations don’t make it a coin flip for whether we see a 75bp or full point rate rise for next week. ​ Gold futures should find some support from the $1700 level.

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