Crude prices are drifting lower as higher prices have prompted many refiners to go back online. COVID cases continue to decline in the US and optimism is high the rest of the world is not too far behind. The oil market deficit that is in place will not change anytime soon despite the recent bearish headlines of rising COVID cases across Eastern Europe and Asia, potentially additional output from Iran, and expectations it won’t be a particularly bad winter for the north.
The dip in crude prices will be temporary but could accelerate a little more if the natural gas prices correct even further. Part of the recent rally in crude came from expectations for added demand due to a shortage of natural gas. The global crude demand outlook is too good for a sustained pullback with oil prices. WTI crude should have strong support ahead of the USD 80 level. Weakness in crude prices has been overdone and the risks of USD 100 oil still remain.
Gold prices are holding up nicely after the ECB turned somewhat more hawkish on inflation. Gold bulls should be encouraged that prices are fluctuating around the USD 1800 level despite hawkish turns by the BOC and ECB. Gold’s last major test will be the Fed taper announcement next week. The Fed should do a better job in pushing back market expectations over tightening. Gold needs sustained dollar weakness in order to thrive. Eventually, it will trade more like an inflation hedge and react less to headlines of central banks pivoting away from stimulus, rising global bond yields, and emerging market rate hiking cycles.
Gold will likely trade through USD 1800 several times before we get to Wednesday’s FOMC decision.
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