Oil falls on China fears, gold edges up

China’s growth fears prompt oil selling

Oil finished last week slightly higher in directionless trading. Brent crude rose 0.95% to USD 102.30 a barrel, and WTI rose 0.80% to USD 97.75 a barrel. In Asia, a darkening Covid-19 outlook in China has prompted growth and consumption fears, sending Chinese equities and oil prices sharply lower today. Brent crude has fallen 2.0% to USD 100.30 a barrel, and WTI has fallen 2.05% to USD 95.80 a barrel.

With the latest scheduled OPEC+ increase, and US and IEA SPR releases out there and priced in, it seems that China continues to drive the bearish price action. Brent and WTI have fallen to the bottom of my ranges, but I expect Brent to remain in a choppy USD 100.00 to USD 120.00 range, with WTI in a USD 95.00 to USD 115.00 range.

As previously stated, a serious escalation of the China virus outlook, resulting in wider and extended lockdowns of urban centres will change my outlook. However, I believe those looking for a more substantial drop will be disappointed. Short of Iran and Venezuela returning to international markets, even with larger China lockdowns, the world still faces a structural oil deficit for the next 6 months because of Russian sanctions. Brent crude is unlikely to fall too far below USD 90.00 a barrel, even if China’s lockdowns ramp up.

Gold shows signs of life

Gold rallied by 0.83% to USD 1947.70 an ounce on Friday, a rather surprising move given the US dollar stayed well supported. Gold appears to have found haven-related buyers hedging weekend risks, but it still did not manage to take out resistance at USD 1950.00 an ounce.

Gold rounds the risk of running out of upside momentum as investors unload weekend hedges, with gold longs being a very poor hedge of slowing China growth. Gold has edged 0.30% lower to USD 1942.00 in Asia and could be setting itself up for one of those false dawn reversals markets have become used to.

Gold is still range trading, albeit to the higher end of that range. I believe the risks are still skewed to the downside for gold, especially if US yields and the US dollar keep climbing. Gold needs to break through USD 1950.00 and USD 1970.00 an ounce to change that outlook. Failure of USD 1915.00 will signal a retest of important support at USD 1880.00 and possibly USD 1800.00 an ounce.

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