Oil moves higher, gold drifting

Saudi Arabia/Omicron lifts oil prices in Asia

Oil prices eased on Friday on omicron fears, Brent crude falling 0.90% and WTI falling by 1.45%. The falls were modest though by recent standards where the intraday volatility had threatened to make oil almost untradeable. The commitment of traders’ positioning also shows a massive drawdown in speculative long positioning, making exposure more balanced, also a supportive factor.

Oil prices have rallied sharply in Asia after Saudi Arabia yesterday announced January price increases to Asian and US customers, and weekend reports from South Africa suggested omicron was less harsh than previous variants. Brent crude is 2.10% higher at USD 71.35 a barrel, and WTI is 2.0% higher at USD 67.75 a barrel.

I am struggling to construct a positive narrative out of Saudi Arabia raising prices, especially as it makes competing grades more appealing to their client base. The best I can do is that Saudi Arabia feels confident raising prices despite higher OPEC+ production because it believes omicron is a storm in a test tube and that the global recovery will not be derailed. The South African reports have reinforced that sentiment.

Whether that sentiment lasts or not, the relative strength indexes (RSIs) that I mentioned last week remain near oversold suggesting that any oil sell-offs from here will be shallower and shorter in nature. Brent crude needs to reclaim USD 73.00, and WTI USD 70.00 a barrel to tentatively say the lows are in place. If omicron is proven over the coming days (or weeks) to be less aggressive, even if it is more contagious, then we can say 100% that last week’s lows were the bargain of the quarter, and possibly for H1 2022, for those brave enough to indulge.

Gold remains forgotten

Gold remains side-lined, trading sideways on a closing basis, despite some decent intraday ranges. On Friday, thanks to a mixed US employment report leading to a flattening yield curve, gold managed to gain 0.88% to USD 1783.90 an ounce. In Asia, gold is barely changed, easing 0.10% lower to USD 1781.70 an ounce.

In the bigger picture, gold looks set to trade in a rough USD 1770.00 to USD 1800.00 an ounce range this week, unable to sustain momentum above or below those levels. The 50,100 and 200-day moving averages (DMAs), clustered between USD 1791.00 and USD 1793.00 provide immediate resistance, followed by USD 1800.00. Support lies at USD 1770.00 and USD 1760.00.

With the omicron outlook looking less bleak, and with longer-dated US yields continuing to fall, gold could well stage a modest recovery this week. However, with the US CPI data on Friday likely to print around 7.0%, gold remains a sell on rallies to USD 1810.00. A 7.0% print will raise the faster taper and rate hike noise ahead of next week’s FOMC meeting, and longer-dated yields could finally shake off their medium-term inflation lethargy. The balance of risks still favours a move lower towards USD 1720.00 an ounce.

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