Oil extends rally, gold slides

Oil’s rally continues

The fall in US crude inventories, surging natural gas prices, OPEC+ production struggles, a slow return of pre-Ida US production, and most importantly, a weaker US dollar, continue to support oil prices which had another impressive overnight rally. Brent crude and WTI jumped 1.80% higher to USD 77.25 and USD 73.25 a barrel.

With more negative stories about the impact of gas shortages coming out of the UK and Europe each day, and with Asian buyers bidding up spot gas cargoes, oil prices are likely to remain firm as a gas substitute. Any large sell-offs due to speculative zeal are likely to be very short in duration and followed by an equally aggressive bounce. Oil prices have crept 10 cents higher in Asia, and as usual, Asian buyers are reluctant to chase prices higher, although I expect them to be out in force on any large price dips.

Brent crude now has USD 78.00 in its sights which opens the path to a test of USD 80.00 a barrel. Support is at USD 77.00 and USD 76.10 a barrel initially. WTI has resistance at USD 74.25 and USD 75.50 a barrel. Support appears at USD 73.00 and USD 71.70 a barrel. One note of caution for the oil rally is that the relative strength indexes (RSIs) on both contracts are approaching overbought levels. Oil may trade sideways over the next few sessions to consolidate gains, rather than immediately power to new highs from here.

Risk-premia unwind torpedoes gold

Gold prices slumped overnight despite the US dollar also tumbling as investors hurriedly unwound Evergrande risk premia after soothing words from Jerome Powell. Gold slumped by 1.45% to USD 1742.00 an ounce. In Asia, weekend risk hedging by local investors has seen gold rise 0.50% to USD 1751.50 an ounce.

Much of gold’s recent rally has been built of increasing fear gauges led by our friends in China. It is unlikely that the Evergrande saga is past “peak-fear,” and we are probably only one headline from another haven rally. As such, gold is not likely to capitulate lower this week. Notably, support at USD 1740.00 an ounce held fast overnight. However, unless Evergrande turns into a contagion mess, gold is unlikely to gain enough momentum to recapture USD 1800.00 an ounce.

I continue to believe that any gold rally this week to run out of momentum in the USD 1780.00 zone, and that USD 1740.00 an ounce continues to support. A daily close below USD 1740.00 signals further losses to USD 1680.00 next week.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was 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 and Channel News Asia as well as in leading print publications such as 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

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