Oil dips down, gold going strong

Oil retreats as OPEC pares back demand forecasts

Oil prices are pushing lower once again on Friday, after falling just short of their October highs earlier this week. The OPEC monthly report alluded to some of the challenges on the demand side in the coming months, as high energy prices likely weigh, prompting the group to revise down their forecasts by 330,000 barrels per day.

That number could rise if we do see further Covid waves which may at least partly explain why producers are so reluctant to increase monthly output targets, even if not doing so is raising prices and contributing to the demand drag. Still, it seems prices may have peaked for now and could consolidate around this region.

Ordinarily, after such a strong rally since the summer, a larger correction may follow – and it still could – but the market is so tight right now and there are so many fundamentally bullish factors supporting price, it looks well supported. Of course, those fundamentals could change if we do see economies slowing down in the coming months, for example, but for now, this continues to look like a bullish market. A move below USD 80 in Brent and USD 78 in WTI and things start to look much different.

Natural gas prices are falling again today, having pulled back significantly recently on signs that Russia is increasing supplies to Europe. They remain very elevated though as this doesn’t come close to resolving the problem as we move into the winter and it may ultimately take the approval of Nord Stream 2 to make a game-changing difference.

Gold pares gains after an extraordinary week

It’s been an extraordinary run for gold, which is paring gains at the end of the week. Inflation concerns have seen the yellow metal’s popularity soar as investors turned to an old friend in time of need. Much has been made of whether gold is still viewed as an inflation hedge or if bitcoin has taken on the mantle and trading this week suggests the traditional choice remains the favoured one.

So despite US yields and the dollar rallying, gold has jumped to a five-month high and appears to have greater ambitions still. Unless the Fed and other central banks provide substantial reassurances that they’re going to tackle higher inflation – beyond waiting for it to pass and hope they’re correct – in other words bring their rate expectations and communication in line with the market, gold will remain in favour.

Thankfully, central banks will have plenty of opportunity for this with various policymakers due to speak next week and plenty more before the next meetings in December, at which point I expect we’ll see significant improvements in their communication.

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