Oil faces challenges this week
Brent and WTI prices diverged on Friday with Brent easing 1.05% to USD83.60, while WTI rose by 0.30% to USD 83.30 a barrel. Brent crude was capped by the US dollar rally on Friday, as well as stories circulating that OPEC+ could spring a surprise production increase at the week’s meeting on the 4th. By contrast, the rundown in stocks at the Cushing Hub, and US EIA data showing US daily production had shrunk by 150,00-bpd was supportive of WTI prices.
In Asia, both contracts have moved in lockstep, opening lower today on weak weekend China PMI data, before rallying on firmer Caixin PMI and pan-Asia Markit PMI data. That rally has quickly run out of steam though and leaving Brent crude and WTI 10 cents lower from Friday’s close.
The oil rally faces some headwinds this week and I note that Brent crude its downside breakout on Friday from a technical perspective. Although I do not believe OPEC+ will succumb to pressure and raise production quotas by the more than the previously agreed 400k barrels, they have surprised markets before. If they do raise production, the kneejerk sell-off could see oil fall by up to 10%.
A hawkish FOMC is another potential headwind, but the immediate threat is natural gas. Much of oil’s recent rally has been driven by the international squeeze in natural gas prices. With domestic storage now full, President Putin has directed Gazprom to start filling its European storage hubs. Spot prices for European natural gas collapsed on Friday by over 20%. Although the energy crunch remains real across China, India and Europe, and alleviating signs are likely to flow into weaker crude prices in the near term.
Brent crude fell through trendline support at USD 84.10 on Thursday, and this line capped its rally on Friday, leading to a weekly close under the trend line, a bearish signal. Brent crude now has resistance at USD 84.00, USD 84.50, and then USD 86.00 a barrel. Support is at USD 82.20, and fail could see it retest USD 80.00 a barrel. WTI looks more constructive, holding trendline support, today at USD 81.80, three times last week. It has resistance at USD 83.70 and then USD 85.50 a barrel. Below USD 81.80, US 80.50 is a critical area of support, followed by USD 79.50.
Ominous price action for gold
Gold fell heavily on Friday, thanks to a powerful US rally on month-end flows and higher employment cost data. Gold crashed 0.85% to USD 1783.50 an ounce before edging slightly higher in Asia to USD 1784.75 an ounce. The undeniable fact now is that gold has failed to maintain gains into the USD 1810.00 region in four out of the last six trading sessions, and that was despite US yields moving lower. Gold, it seems, is now back to its inverse correlation to the US dollar.
With a heavy week of data and event risk ahead, the balance of probabilities has now shifted back to the downside for gold, unless the US dollar was, for some reason, to collapse this week. Time and again, gold investors have shown little to no appetite or ability to wear even the slightest pain on long positions above USD 1800.00 an ounce.
Gold now has resistance in the USD 1810.00 to USD 1815.00 an ounce region, with the far more formidable, and critical, USD 1832.00 to USD 1835.00 remaining far from reach for now. On the downside, gold fell through its one-month trendline support at USD 1787.60 on Friday, and its 100 and 200-day moving averages. The long capitulation saw gold fall to USD 1772.00 an ounce intra-day on Friday, and that forms initial support now. That is followed by USD 1760.00 and USD 1745.00 an ounce. Ahead of the FOMC, I expect a choppy USD 1770.00 to USD 1810.00 to prevail.
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