Oil and gold rally

Oil prices rally again overnight

Oil prices ignored the peak inflation noise from equity and currency markets, posting another day of sharp increases as concerns around tight supplies globally persist and China Covid restrictions were eased in Shanghai. The difference in perceptions between the various asset classes could not be starker now. What gives the oil rally overnight more credibility is that US official Crude Inventories leapt by an enormous 9.40 million barrels, yet oil prices continued to rally aggressively.

Brent crude leapt higher by 3.75% to USD 108.80 a barrel, a near 9.50% gain over the last two sessions. WTI rallied by 3.25% to USD 104.25 a barrel. Asian buyers have been absent today, with volumes potentially being curbed by the long weekend across most of Asia, Europe, and North America. That has allowed some long covering by fast money traders to dominate, pushing Brent crude down 0.90% to USD 107.80, and WTI down 0.50% to USD 103.70 a barrel.

That impact may be waning now as OPEC refuses to increase production, and the situation in Eastern Europe continues to darken. The fact that oil continued to rally after such a large jump in US Crude Inventories and that China concerns have suddenly been forgotten, is a serious warning signal to those pricing in the top of oil markets. There is also plenty of possible headline risk over the holiday period.  I expect Brent to remain in a choppy USD 100.00 to USD 120.00 range, with WTI in a USD 95.00 to USD 115.00 range. Brent crude has further support at USD 96.00, and WTI at USD 93.00 a barrel. The risks, however, have skewed back to the topside.

Gold’s rally continues

Gold’s rally continued overnight, helped along by a US dollar that corrected lower as markets priced more aggressive hikes around the world while assuming all the Federal Reserves are now priced in. That somewhat conflicts with the inflation-hedging narrative that I am hearing surrounding gold’s rally this week and either the equity market, or the precious metal market, is heading for a harsh dose of reality.

What must be respected is that gold is now rallying when the US dollar rises, and when it is also falling, suggesting underlying strength. Gold closed 0.57% higher at USD 1977.80 an ounce overnight, before retreating slightly to USD 1972.50 an ounce in Asia. Given that Asian traders don’t seem to be hedging long weekend risk via gold purchases today, the price action this morning is tempering my expectations of a test of USD 2000.00 shortly.

Gold has initial resistance at USD 1980.00, which has held on a closing basis for two sessions in a row. After that, a test of USD 2000.00 is entirely possible, although I believe option-related selling there will be a strong initial barrier. If that is cleared, gold could gap higher to USD 2020.00 an ounce quite quickly.

A retreat through USD 1940.00 will signal a whipsaw move lower, chopping out the short-term money. Failure of USD 1915.00 will signal a retest of important support at USD 1880.00 and possibly USD 1800.00 an ounce. I can honestly say I don’t know which scenario will be the winner at this moment.

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