Gold and oil lose ground

Libyan production sends oil south

The volatile range-trading in oil contracts continued into Friday, with oil giving up all of its Thursday advances in unceremonious fashion. The chief culprit was Libya, where the national oil body lifted all its force majeure’s and ramp up production to 1 million barrels per day in the next few weeks. That headline immediately sent oil lower, Brent crude falling 1.75% to USD41.65 a barrel, and WTI falling 2.15% to $39.70 a barrel.

A stronger US dollar this morning and possibly some stop-loss selling action have seen both contracts reset lower again. Brent crude and WTI falling 1.45% to USD41.10 and USD39.15 a barrel respectively. Ominously, both contracts have broken weekly support, triggering stop-losses and leaving the technical picture for both looking very ominous.

Brent crude broke through USD41.45 a barrel which now becomes resistance. More importantly, it is testing its 200-day moving average (DMA) at USD41.15 a barrel. A daily close below here this evening would be a very negative technical development, suggesting deeper losses to long-term support at USD39.00 a barrel.

WTI is flirting with support between USD39.00 and USD39.20 a barrel as I write. A daily close under this region sets up further losses to its 200-DMA at USD37.55 a barrel. The day’s opening price at USD39.70 a barrel is initial resistance.

The return of just one million barrels per day of extra production to the world market has sent oil into a tailspin. It highlights how fragile sentiment is to the supply/demand balance of oil in international markets. A double-dip recession in Europe will add to the demand concerns. The scheduled increase by OPEC+ of two million bpd in January is likely to be in jeopardy if Brent crude prices stay at these levels. I would argue though, that Brent crude will need to fall under $35.00 a barrel for OPEC+ to look at rolling back production increases thus far altogether.

With risk-sentiment likely to turn south this week ahead of the US election, oil will remain a sell on rallies and will be acutely vulnerable to further losses unless OPEC+ makes some soothing noises.

Gold is threatening to break hearts

Maybe the Halley curse for gold has struck again, with gold failing to break out on the top side of its symmetrical triangle on Friday. Gold fell just 0.10% to USD1902.50 an ounce on Friday but has dropped another 0.20% to USD1898.50 an ounce this morning.

Because of range-compression within the triangle formation, that has left the base of the triangle at USD1899.15 an ounce this morning. With gold failing to break out of the top of the triangle last week, failing at USD1931.00 an ounce, a move through its base today is a worrying development to the bullish outlook. The price action raises concerns that the market is heavily long into the US election on “blue wave” and US stimulus hopes, increasing the odds of a culling of positioning this week.

A move lower through the 100-DMA at USD1883.40 an ounce would almost certainly confirm this view, and likely bring stop-loss selling to the market. The technical picture called for a USD100 an ounce move, depending on which way the triangle broke. That move targets around USD1800.00 an ounce now on the downside. Although my baseline view was that gold should rally on risk hedging into the US election, there is a real possibility of a significant downside detour first.

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