Oil rises, do-or-die time for gold

Oil rallies on soft inflation data

Crude prices settled higher after first going on a rollercoaster ride in early trade.  Oil prices tumbled early after China announced the plan to sell 7.38 million barrels from its strategic reserves.  Last week, China shocked energy markets by announcing that they would tap their reserves for the first time.  The China reserve sale-driven drop was short-lived as energy traders viewed the amount of barrels as small, roughly a half day’s worth of crude processing.

The focus in the energy market still remains on US production and if Storm Nicholas leads to flooding that could keep production shut-in.

WTI crude rallied after a softer than expected CPI reading sent the dollar sharply lower.  Oil rallied alongside all risky assets as the smallest price gain in seven months suggested the Fed won’t be in a hurry to make a taper announcement.

The US inflation report showed the index for airline fares plunged, decreasing 9.1% over the month, a confirmation that demand has moderated.

With an oil market still heavily in deficit, WTI crude will continue to rise if US stockpiles continue to fall and if China’s economy doesn’t slow down too much.  Over the short term, WTI crude should not have much trouble hitting the mid-USD 70s.

Gold

Gold prices got a strong boost from a lighter-than-expected inflation report, that completely removed the risk of a September Fed taper announcement and likely shifted expectations all the way to December.  Treasury yields plunged and that helped gold tentatively pierce the USD 1800 level.  This is a pivotal moment for gold and if it can’t push higher as yields plunge, selling pressure could quickly return.

CPI is decelerating and that should be very good for gold in the short-term as real interest rates go down.  After the August CPI print, gold should have enough momentum to stabilize above USD 1800 by the end of today, but if it doesn’t, it could get very ugly.

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