Oil slips, dollar sends gold lower

Oil markets were long and wrong

Oil markets fell to earth overnight, with both Brent crude and WTI suffering heavy losses after the official US crude inventory data. Although crude inventories fell as expected by 1.0 million barrels, gasoline stocks unexpectedly rose by 1.90 million barrels. That spooked investors, who ignored the fall in distillates, worried that the spike in Covid-19 cases was starting to hit US consumption. Brent crude fell 2.50% to USD41.30, and WTI fell by 2.75% to USD40.00 a barrel.

Likely, though, oil markets were primed for a correction lower. Oil traders had spent the week pushing crude prices higher in anticipation of a US fiscal stimulus deal getting over the line. Ignoring the risks to that premise as other markets had been doing. Simply put, oil markets found themselves very long and wrong at the top of the week’s range, and with the risk tone in markets suddenly cautious yesterday, everybody ran for the exit door at once.

A bounce in the US dollar this morning has seen both contracts fall again in Asia. Brent crude has declined 0.50% to USD41.50 a barrel. It is now testing its 200-day moving average (DMA), and the bottom of its two-week range at USD41.40 a barrel. A deterioration in the risk environment increases the likelihood of further losses, with a failure of the 200-DMA suggesting a fall as low as USD39.00 a barrel is possible.

WTI has fallen 0.60% to USD39.75 a barrel today. It remains comfortably above support at USD39.00 a barrel, and its 200-DMA at USD37.75 a barrel. WTI now has resistance at its 100-DMA at USD40.30 a barrel, and its 50-DMA at USD40.50 a barrel. Although the technical picture is not as gloomy as Brent crude, which is buffeted by both US and European consumption fears, the deteriorating risk environment around the debate tomorrow, and US stimulus uncertainty, means WTI will not be immune to further losses.

Gold eases in Asia as US dollar rallies

With Asian markets picking up the US dollar baton and running with it as the region enters risk-hedging mode, gold has retreated this morning, giving up much of its modest gains overnight. Gold has fallen 0.50% to USD1914.00 an ounce today.

While gold is on the back foot this morning, a realisation that a US stimulus package could well fail in the Senate, and the looming presidential debate tomorrow morning, should see risk hedging flows return to the yellow metal. Gold has held its own despite a steepening US yield curve and its remains just above its triangle breakout at USD1913.00 an ounce.

That triangle suggests that gold has the potential to rally by over USD100 an ounce in the coming week, entirely plausible if US electoral uncertainty increases, and stimulus hopes fade. Gold’s sternest test will be if US equity markets take a substantial turn for the worst, as gold has tended to follow aggressive equity sell-offs closely in 2020.

Gold has support just under present levels at USD1913.00 an ounce, the top of the symmetrical triangle, followed by USD1895.00 an ounce, the base of the triangle today. The 100-DMA follows that at USD1880.00 an ounce. Resistance appears at USD1924.50 an ounce, the 50-DMA, followed by a double top a USD1931.50. Gold’s outlook looks positive despite this morning’s retreat, with only a fall through USD1895.00 an ounce invalidating.

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