Oil could correct further despite Thursday’s dip-buying
Oil prices recovered strongly on Thursday after trading more than 2% down on the day for a second successive session. They’re a little lower so far today which may suggest that, despite early dip-buying, crude prices could still face a deeper correction after such a prolonged and substantial rally over the last couple of months.
Of course, the fundamentals remain very bullish for oil prices with the world in the midst of an energy crisis as winter approaches in the northern hemisphere. And OPEC+ appear entirely unwilling to do anything to alleviate these price pressures, which makes it highly unlikely that the group will raise monthly production increases from 400,000 barrels per day when they meet next week. With producers struggling to hit targets as it is, it may not just be a lack of will, although they do appear pleased with prices at these levels.
Reports that talks will resume over the Iranian nuclear deal next month may be weighing a little on prices, given the prospect for a large amount of oil to come back into the market, but an agreement is probably not close so it’s not going to alleviate current pressures. That said, it’s come at a good time just as the rally was looking very overcrowded so it may aid the correction.
Gold breaks lower as yields continue to rise
US yields are rising and the dollar is being lifted up in the process, potentially aided by some risk aversion we’re seeing in the markets on Friday. Higher yields and a stronger dollar is a terrible combination for gold, which is almost 1% down and on course to once again fall short of closing the week above the USD 1,800 handle.
While the yellow metal has arguably shown strong resilience this week in the face of higher yields, not typically something associated with gold performing well, it has generally been supported by softness in the dollar as yields outside the US have rallied aggressively.
The rise in yields is also associated with high inflation and interest rate expectations, but not a hot economy, rather than a combination of all three which we would typically see. Perhaps this is lending itself to gold remaining well supported. That said, it has broken a rising trend line that’s accompanied the rally this month, as well as recent support, which may point to near-term weakness with the next test of support coming around USD 1,770.
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