Oil drifting, gold in choppy waters

Oil drifts lower amid recession risk

The threat of a global recession continues to weigh on oil prices, with widespread monetary tightening over the last couple of days fueling fears of a significant hit to growth. Central banks now appear to accept that a recession is the price to pay for getting a grip on inflation, which could weigh on demand next year.

At the same time, the market still remains tight and OPEC+ is perfectly willing to restrict supply further even as it fails to deliver on quotas it has set itself so far. What’s more, a nuclear deal between the US and Iran looks no closer and Russia’s mobilization could pose a risk to its supply.

As for the price cap that the EU is working hard towards, that’s a big unknown as it may not even get the unanimous support it needs from member states. If it does, there’s no guarantee it will work without the cooperation of those that Russia has been able to lean on since sanctions came in and if it is effective, Russia could reduce supplies and cause a price spike. With that in mind, very little is probably priced in at this point.

Is gold eyeing a correction?

It’s been a choppy week for gold amid all of the central bank tightening and yet it hasn’t really progressed in that time. The break below $1,680 was a big deal but it hasn’t really been the catalyst for anything since. While it hasn’t accelerated lower so far, it does continue to see resistance at $1,680. How long for depends on whether all of this tightening becomes a trigger for a correction in the dollar and maybe yields.

If we do see a corrective move then the next big test may come around $1,730 which was previously a major level of support and then resistance. A break of this would suggest a much deeper correction may be underway. A break below $1,650 on the other hand could be viewed as a secondary confirmation of the initial breakout and a very bearish signal.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.