Oil lower on OPEC+, gold rallies on Powell

OPEC+ sends oil lower

Reports are emerging that Saudi Arabia and the UAE have reached an agreement on their dispute, with the UAE apparently securing a higher production baseline. That followed official US crude inventory data that showed another large fall in headline inventories but a significant increase in gasoline and distillate stocks.

That combined to seen oil prices sharply lower, with Brent crude falling by 2.40% to USD 74.50 a barrel and WTI falling by 3.0% to USD 72.90 a barrel. The sell-off has continued in Asia, with both contracting falling around 0.50% to USD 74.20 and USD 72.50 a barrel, respectively.

Any agreement between Saudi Arabia and the UAE must be signed off by the whole OPEC+ grouping, adding a layer of uncertainty to the proceedings. Further muddying the waters, Iraq has also allegedly now asked for a higher production baseline. If this is the start of a flood of member requests, then oil prices are now vulnerable to a deeper correction lower.

The threat of weaker OPEC+ cohesion and higher than anticipated production will cap oil price gains for now. Brent crude has support at USD 74.00 and USD 72.00 a barrel, and failure of USD 72.00 could see a speculative capitulation trade occur, although I expect its duration to be short, if brutal. WTI’s line in the sand will be at USD 70.00 a barrel, and I expect some similarly ugly stop-loss selling to occur if it fails.

Oil’s underlying positive fundamentals remain intact, despite the Covid-19 issues across Asia, ex-China. Oil’s short-term price action will revolve around OPEC+ cohesion and whether higher baseline production requests start flowing in from other members.

Gold’s price action looks impressive

Gold prices rallied overnight after Jerome Powell was suitably dovish in his congressional testimony. Gold rose 1.10% to USD 1827.50 an ounce, closing just above its 200-day moving average (DMA) at USD 1826.50 an ounce, a bullish technical development.

Gold has weathered the storm of higher US yields and a higher US dollar with aplomb this week, remaining rock solid at USD 1800.00 an ounce and comfortably above support at its 100-DMA at USD 1790.00 an ounce. It has resumed its rally powerfully as soon as those pressures alleviated, and this implies to me that gold is targeting further gains ahead.

Gold has support at USD 1820.00 and USD 1800.00 an ounce, with the bullish outlook intact as long as the 100-DMA at USD 1791.00 holds on a closing basis. Gold’s next upside targets are USD 1845.00 and USD 1860.00 an ounce, although I expect more of a slow grind higher, rather than the fast jump seen overnight.

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