OPEC surprise, gold rebounds

Oil

Crude prices went on an OPEC+ rollercoaster ride.  Oil prices seem poised for a modest gain as OPEC+ members seemed like they were leaning towards agreeing upon a one- or two-month rollover.  Most oil price gains were reversed after the debate shifted towards the proposal for gradual hikes.

The OPEC+ decision for a gradual output increase surprised some energy traders.  Expectations were for no increase in May but a stronger raise in June.  Given the improving crude demand outlook in Europe, oil prices did not completely fall off a cliff given the staggered output increase across May through July.  OPEC+ agreed on consecutive 350,000 bpd increases in May and June, lastly with a 400,000 bpd raise in July.

Brent crude hovered near session lows awaiting the Saudi decision on what they will do with their voluntary cut.

The Saudi plan to slowly end their voluntary cuts was well received.  Saudi Arabia is expected to ease cuts by 250,000 in May, 350,000 in June and 400,000 in July.

The COVID hit to investment in new production is lasting and making supply inelastic.  Stable oil prices appear to be the trade with higher prices anticipated once Europe’s demand outlook improves.  As wells start to run dry in the coming months, oil prices will eventually surge higher once demand overtakes supply.

Gold

Gold has a bottom in place.  The S&P 500 index broke past the 4,000 level, a massive resistance level and gold prices are higher today.  The brightening economic outlook has been mostly priced in and the next handful months of infrastructure negotiations suggest a steady rising Treasury yield environment which should still be supportive for gold prices.  The inflation debate is a global story, but when the weaker dollar trade returns, this will likely coincide with a string of surging pricing pressures in the US.  The consensus on Wall Street is still that inflation won’t materialize, but the risks are growing that it could.

Gold has rebounded almost USD50 from yesterday’s low as Treasury yields continue to drop, down from 1.78% to 1.68% over the past couple of days.

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