Oil bounces back, gold unable to rally

Oil stages an impressive recovery after Friday’s bonfire

Oil will be the market where short volatility traders go to die this week. The omicron whipsaw is on full display today as Brent and WTI, having fallen by over 9.0% on Friday, have staged a very sharp rally in Asia. Brent crude has risen by 4.78% to USD 76.35 a barrel, and WTI has rallied by a mighty 5.45% to USD 71.85 a barrel, thanks to some tenuous reports that Omicron’s symptoms are mild. Time will tell if this is correct (and I hope it is), but financial markets aren’t waiting around to find out.

The picture for oil is further muddied by the OPEC+ JMMC meeting and full meeting this week, the latter occurring on Friday. Negotiations with Iran restart in Vienna today as well over their nuclear programme. The prospect of Iranian crude increasing on international markets, another potential volatility point. Add all that in with virus developments and whipsaw price action this week in oil, is more likely to be chainsaw action.

OPEC+ compliance has held steady above 100% for quite some time now, suggesting there is not much swing production available to open the pumps anyway. I also note that pre-Omicron, US production had recovered to 11.5 million bpd, yet prices were still high. That would suggest OPEC+ would have been comfortable raising production targets as planned, even if they couldn’t actually pump it.

However, OPEC+ has also repeatedly noted that a resurgent virus is one reason why they have been cautious about lifting production. OPEC+ has also forecast markets moving to a global daily surplus in early 2022. Taken with increasing US production, SPR releases, and now a potential Omicron roadblock to the global recovery, OPEC+ probably has all the excuses it needs to hit the pause button on increasing production in December and awaiting further virus clarity. Friday’s capitulation will have cemented that thinking.

Either way you cut it, I can’t help but feel that Friday’s lows were probably the bargain of the year if you were an oil buyer, speculative or physical. Technical indicators are pretty useless in markets like this, but I note that the RSIs on both contracts are close to oversold, and that both Brent crude its 200-day moving average (DMA) on Friday at USD 72.70, while WTI has regained its 200-DMA at USD 70.00 a barrel this morning.

Gold, the forgotten haven

Friday should have been gold’s safe-haven day in the sun, and for a short time it wise, rising USD 23.0 an ounce to USD 1815.50 at one stage. However, by the session’s end, gold had slumped back to a USD 1793.00 close, a minuscule gain. Like bitcoin, gold suffered over the course of Friday even as US yields and the greenback sank. One reason is likely the very poor performance of platinum and palladium on Friday, the other is likely to be cross-margining stop-outs with investors liquidating gold positions to cover losses in equities for instance.

A general recovery by platinum group metals, industrial metals and cryptos today has failed to flow into gold strength, perhaps because US yields and the US dollar are higher. Whatever the underlying dynamics, the price action is negative, gold rising just 0.10% to USD 1794.80 this morning, with the recovery rally leaving it behind. That suggests that the downside is the path of least resistance for gold, and it is a sell on rallies this week.

Gold will have resistance at USD 1800.00 and USD 1815.00 to start the week, with the post-open spike to USD 1770.00 an ounce this morning, a dubious move even by Monday Asia futures open standards, will provide initial support. In between, gold may find some friends around USD 1780.00. Failure of USD 1770.00 signals a retest of USD 1760.00 and USD 1740.00 an ounce.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

Latest posts by Jeffrey Halley (see all)