Oil flips to contango, gold softens

Oil prices retreat on oversupply concerns

Oil prices are declining as market structures flip to contango, the dollar resumes despite falling bond yields, and a dreary European short-term crude demand outlook.  Brent’s prompt spread is in contango as oversupply fears return due to lackluster demand.  The bumpy reopening process in Europe is raising concerns that they might not have a normal summer.  Lockdown extensions are crippling near-term demand forecasts and that could keep crude prices heavy a little while longer.

WTI crude weakness could target the mid-USD50s, but a sustained move below USD50 seems unlikely.  Europe should see lockdowns thwart the current COVID wave and vaccine rollouts will improve over the next couple of months.

Gold

Gold prices are modestly softer despite a much stronger dollar.  The global economic recovery is hitting a few big road bumps and that is driving some safe-haven flows into gold.  Gold had a limited reaction from Fed Chair Powell and Treasury Secretary Yellen’s joint testimony on Capitol Hill.  The dovish duo reaffirmed their assessment on the economy and the amount of support that is still required for the recovery. Their appearance was on the uneventful side. Powell reiterated his optimism that the USD1.9 trillion pandemic relief bill will not lead to an undesirable increase in inflation, adding that the Fed has tools to address any sustained pricing pressures.  Yellen reminded lawmakers that “very deep pockets of pain” are in the data.  She pledged that the government had the backs of small businesses, but did not give any details on the proposed sustainable infrastructure spending plan.

Gold is struggling for direction right now and a continued consolidation might be the trade for now.  Investors waiting for a make-or-break moment in the bond market might have to wait until Thursday’s seven-year notes auction.  Gold might be stuck between USD1700 and USD1750 until we get past that key auction.

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