Oil climbs on demand, gold choppy

Oil rises as inventories drain

Oil is extending gains on Thursday as the demand outlook continues to brighten against a backdrop of shrinking crude inventories. Both oil benchmarks hit a fresh two-year high on Wednesday, with crude piercing USD74 per barrel and Brent spiking to USD76 before easing slightly into the close.

Oil prices continue to hover around these elevated levels amid supportive fundamentals. EIA inventory data revealed a larger-than-expected draw on stockpiles of -7.6 million barrels, almost double the expected 3.9 million barrel draw. The decline follows a 7.3 million barrel draw last week and marked the fifth consecutive weekly fall in stockpiles – the longest run since January.

The continuous draw in inventories reflects tightening in the market as demand ramps up from the likes of the US, China and Europe. Thanks to rapid and successful vaccine programmes, the reopening of these economies has boosted fuel consumption, draining stockpiles.

Demand is outstripping supply, which is lifting prices. The question is whether OPEC+ will allow this to continue when they meet next week. There’s a good chance some countries in the group of oil producers vote to increase oil production.

Gold struggles for direction

Gold continues to tread water on Thursday for a second straight session. In fact, apart from a 1% bounce on Monday, the yellow metal has looked pretty flat all week as it consolidates, following 6% declines last week.

Mixed messages over inflation from the Fed has left gold bemused and struggling for direction. On Wednesday, two Fed officials said elevated inflationary pressures could last longer than initially expected. Atlanta Fed President Raphael Bostic even expects a rate hike in 2022, sooner than the Fed’s median of two hikes in 2023. The more hawkish rhetoric comes hot on the heels of Chair Powell’s calming comments that inflation was transitory, and the Fed is in no rush to tighten policy.

Gold doesn’t know what to make of the conflicting outlooks and will instead look to inflation data tomorrow for further clues.

Currently, the bias in gold is to the downside, and further weakness could see support at USD1769 tested.

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