Oil concerns after a massive drop in US inventories; Sense of bullish calm returns to gold

Oil prices rose overnight, but not spectacularly so. Oil should have done much better after a massive fall in US Crude Inventories of over 10 million barrels, as well as the tailwinds from a generally much weaker US dollar. Instead, Brent Crude edged just 1.10% higher to USD43.70 a barrel, and WTI rose an even less than impressive 0.45% to USD41.40 a barrel.

Both contracts remain adrift in their tight one-month trading ranges, with their inability to rise on falling US oil stocks, or a weaker US dollar an increasing threat to their 3 1/2-month rally. It may well be that oil markets are pricing in a higher risk of an economic downturn in the US and places elsewhere due to Covid-19. It could also be the physical demand has already started peaking. Shale producers hedging production, even at these levels in a desperate race for cash could also be capping price rises. Whatever the reason, the longer that oil refuses to rally on underlying price supportive factors, the higher the risk of a potentially ugly downside correction.

Brent crude has resistance at USD45.00 a barrel, with WTI’s resistance now at USD43.00 a barrel, its 200-day moving average. Both need to make constructive progress at eroding those levels in the near-term to maintain the bullish case.

A sense of bullish calm returns to gold
Gold markets put the volatility histrionics of the past two days behind them overnight, with a suitably dovish FOMC and the ensuing weaker US dollar lifting gold prices. The return to a sense of normality saw gold push 0.70% higher to close at USD1970.00 an ounce.

Gold has edged lower to USD1964.00 in Asia, with the move looking very much like the profit-taking flows we are seeing in currency markets today. The underlying bullish case for gold remains intact. That is a liquidity-ready Federal Reserve, negative real yields across the US yield curve and a lower US dollar.

Gold though does now have resistance to overcome ahead of a test of the USD2000.00 an ounce region. It has traced out a double top at USD1981.00 an ounce, which will provide stern resistance to short-term rallies. Given the volatility of the past two days, initial support is now somewhat distant at USD1941.00 an ounce.

Although profit-taking is dominating price action in Asia, I expect upside pressures to resume once Europe and the US arrive at their desks.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst - Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia and the New York Times. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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