Geopolitics: A Tale of Two Commodities

Geopolitics rising temperature launches gold higher but sent oil back to earth initially.

OIL

It is a strange world that we live in when the financial press globally is reporting that oil has fallen because of geopolitical tensions in the Middle East. Saudi Arabia, the United Arab Emirates and Bahrain are imposing effectively, an air and land blockade on Qatar and evicting their citizens and diplomats for alleged Qatari mischief-making around the region, including passing cash to Iran. Unsurprisingly, Iran has thrown its full weight behind Qatar.

The line of group thinking seems to be, that a belligerent Iran may walk away from its OPEC production cut quota, starting of a cascade of agreement breakers and undermine the entire OPEC agreement. Which quid pro quo would indeed be bad for oil. I should note, Qatar is the world’s largest LNG exporter and a minor oil producer. The merits of that argument aside, I would argue that the possibility of Saudi Arabia and the Gulf Co-Operation Council squaring up to Iran across the Gulf of Arabia, one of the world’s maritime choke points for a huge amount of the planet’s energy needs, is not bearish for oil.

A more plausible explanation for the brick wall the oil rally ran into in North America is intraday longs taking profit and U.S. shale producers lining up to sell the rally in large size for hedging purposes. It seems to me a case of fitting the facts to the price action and not vice versa. Time will tell of course, but traders would be well advised to monitor their news feeds carefully and to be alert to rapid changes in short-term sentiment.

The argument goes the market is always right because the market sets the market price and the price action on crude in Asia today continues to be poor. Both Brent and WTI were hovering just above their post-OPEC lows in early Asian trading, with Brent spot falling 20 cents to 49.00 and WTI spot also falling to 46.75. That appears to be reversing into Europe where maybe reality is biting.

That seems to be shifting into Europe where maybe reality is biting. Brent has rallied to 49.40 and WTI to 47.60 to see both contracts up nearly 1.80% from their lows this morning.

Brent spot has resistance at 49.50 initially followed by 50.60 with support at 48.75.

WTI spot has resistance at 48.00 with support at 46.50, the post-OPEC low.

GOLD

Gold traded sideways in early Asia, following the pattern of yesterday after Friday’s Non-Farm inspired rally. It has moved much more to plan though through the remainder of the session, surging ten dollars (0.80%) to two-month highs of 1288.55 as we head into Europe.

Middle East tensions have certainly underpinned the yellow metal this morning, but it is the latest polls from the U.K. ahead of Thrusday’s election which are raising the temperature. Depending on which one you look at, the Conservatives lead could be as small as one percent over Labour.

The price action remains constructive, with the technical picture suggesting gold is consolidating before another potential push to the upside. With event risk in the form of this Thursday’s ECB rate decision and the U.K general election, one would expect the safe haven bid to be alive and well as the week progresses.

Gold is trading at 1288.55 with resistance at the April high of 1295.70. A break of this level would suggest a possible imminent test of 1300. Support appears at 1277 followed by the 1270/1272 breakout region.

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