The past three weeks have been very volatile for oil with WTI trading at around $37 on Thursday. Just when it appeared the oil bulls were taking prices to pre-pandemic levels; the Bears showed their teeth by taking the markets on a downward spiral.
We can look at what has really made the markets move in the past fortnight and what the fate of the oil markets are in the short-term.
Why are prices down?
Strong dollar and gasoline demand
Oil prices settled lower last week, pressured by a stronger U.S. Dollar, which dampened demand for the dollar-denominated commodity. The strength of the dollar would come as a surprise as markets predicted the bearish pattern of the dollar. Still, in line with the inverse relationship, Dollar got stronger and oil crumbled. In addition to the fall of oil prices last week, it was also observed that there was weak demand for gasoline in the short term. There were also expectations that refinery demand for crude will weaken in the fall.
A report from the U.S. government showed shrinking domestic crude and gasoline inventories. It is expected that many refineries will soon stop operations to conduct usual maintenance. The double whammy of maintenance of refineries and downturn in summertime fuel consumption gave oil a bearish outlook. Until schools and offices open, we are faced with a possibility of low demand and this weighed on oil prices.
The refined products market has remained weak, and this is no surprise given the impact on fuel consumption on the demand side. Very few Asian refiners are buying oil as they still have loads of oil bought when prices were low.
There were murmurings from state media that Iraq was seeking exemption from cuts and this weighed down on oil prices. Although Iraq’s oil ministry denied the reports in state media that the country was considering an exemption from its production quotas and obligations, the rumor portrayed cracks in the wall of the OPEC accord. Notably, there have been compliance issues with Iraq and Nigeria, and any sort of uncertainty influences prices downwards.
Saudi OSP cuts.
Saudi Aramco devalued its October official selling prices for crude supplies to Asia and the US, as the company forecasted slow demand of oil from these areas. The pandemic is still a major bear card in this market and until there is an equitable distribution of vaccines, it would still be a factor to consider before placing oil positions.
What gave The Bulls momentum earlier?
The calm before the storm
Two weeks ago, the Gulf of Mexico, which appears to be one of the largest production areas of US Oil, was taken aback by magnanimous hurricane levels. Hurricane Laura approaches the Texas-Louisiana coast and many energy participants wondered how it will impact the energy sector as the areas affected is mostly important oil and petroleum area in America. There was a disruption in the Oil Production as around 1.6 million barrels per day of offshore crude oil production were stopped as production members in the Gulf of Mexico had fled the areas. That amounted to over 80% of U.S. offshore crude oil production in the Gulf of Mexico. This affected inventories and sent prices up as supply was taken off the market.
Another situation that gave Bulls momentum was the decline of the dollar during that same period. It is evident there is an inverse relationship between the US dollar strength and oil prices. Dollar faced a bashing against other currencies as the U.S. economy proposed to keep the dollar lower. This gave a lift to crude oil prices.
Vandana Hari, founder of Vanda Insights said “as far as fundamentals are concerned, there is really not much to move oil around either way, which is why we have seen it pretty range-bound but within that, continuing to grind higher because of a weaker dollar.”
Goldman Sachs outlook
In a statement released from Goldman Sachs, the investment bank said, “Key to the resilience of spot prices, despite stalling inventory draws this summer, has been the steady rally in long-dated prices,”
The statement was so bullish to the markets, it was recommended as an effective portfolio hedge against uncertainty in other sectors. Analysts saw this as a positive sign, and this sustained the bullish outlook on prices.
Oil prices plunge on fears OPEC+ may increase Oil supply
Oil traders are becoming wary that OPEC+ will increase oil output and further distort the energy demand/supply dynamics.
Oil prices lost more than a percent at the second trading session of the week. Oil traders are virtually going to extend short on concern that OPEC may agree to increase global supply in a meeting this week and Chinese demand may be dropping.
At the time of writing this report, Brent crude dropped by 1.2%, to trade at $62.91 after losing 1.1% in the past day. U.S. West Texas Intermediate (WTI) crude dropped by 1.2%, to trade at$59.90 a barrel, having lost 1.4% on Monday.
Oil traders are becoming wary that OPEC and its allies, a group often referred to as OPEC+, will increase oil output and further distort the energy demand/supply dynamics.
The group meets is scheduled to hold on Thursday as discussions might include allowing as much as 1.5 million barrels per day of crude oil back into the market.
Stephen Innes, Chief Global Market Strategist at Axi in a note to our source explained why the OPEC+ meeting matters most to many oil traders.
“Constructive oil market fundamentals have blown slightly off course ahead of the OPEC + meeting on Thursday as oil prices took to the plunge pool overnight, with Brent back to the soft US$63 handle after trading as high as $66.82 only last Thursday.
“Commodities were mostly weak overnight as the dollar regained a bit of ground. OPEC+ will meet this Thursday, and expectations are that despite Saudi Arabia’s call for caution, most members will push for an increase in output,” Innes stated.
Bottom line: energy pundits expect the all-important meeting this week in being one of the most interesting oil meetings in Q1, with Saudi Arabia urging producers to remain “extremely cautious”.
Gold posts worst monthly decline since 2016, as U.S dollar keeps rising
The precious metal posted its worst monthly decline since 2016 as gold prices broke below the $1,750 support.
Gold has of late been under immense pressure, as the Dollar Index surged to a one-week high of 90.8. The safe-haven currency is an outright alternative to gold and typically pressures gold when it gains.
The precious metal posted its worst monthly decline since 2016 as gold prices broke below the $1,750 support at the last trading session of the week, following most commodities and global stocks lower for a second straight day as global investors readjusted their portfolios.
With Friday being the last trading session for the month of February, it wrapped up the month with a 6.6% decline, its worst since a 7.2% decline in November 2016.
Gold for April delivery lost about 2.6% to settle at $1,728.80 per ounce. It earlier plunged to $1,715.05, its lowest point since a June 8 bottom of $1,700.10.
For the week, the precious metal contract lost about 2.7% in value, following through with the previous week’s drop of 2.5%.
Stephen Innes, Chief Global Market Strategist at Axi, in a note to our source, spoke on other prevailing macros weighing heavily on gold prices
“The rise in real yields has seen gold under pressure with everyone selling. Although positioning is cleaner, the overall market is still long, and ETF selling negatively affects the market on actual position clean out rather than just speculative sell-off. Which is more worryingly an early sign of a capitulation.”
Gold traders are not keen on going bullish, at least for the near term, on the bias that rising U.S Treasury yields see investors showing less interest in the yellow metal.
Gold maintains shine after advancing for two days
The bullion asset regained its lustre after a 2.2% drop recorded in the past week,
Gold stayed on course at the second trading session of the week after advancing for two days, as metal traders awaited testimony from U.S Fed Chief, Jerome Powell.
At the time of drafting this report, the bullion asset traded at $1,807.24 an ounce after rising 1.9% over two days.
The U.S Fed Chief’s semi-annual report at the U.S congress today and the next day will be monitored by metal traders for further policy guidance, and his assessment of the economic recovery at the world’s largest economy.
The bullion asset regained its lustre after a 2.2% drop recorded in the past week, as traders refocus on rising inflation expectations.
In an explanatory note to Our source, Stephen Innes, Chief Global Market Strategist at Axi, gave valuable insights on how the precious metal managed to stay above the $ 1,800-ounce price level.
“It was a strange world seeing the commodity locomotive racing at full steam, but gold left-back at the station. But correlations are looking more normal today after yesterday morning signal gold was trading slightly higher in delayed response to USD weakness. A weaker US dollar remains one of the primary lift-off balloons.
Gold built on Friday’s modest rally, clearing and holding above the USD1,800/oz level. USD weakness was likely the key factor behind gold’s recovery.”
What to expect: The U.S congress may vote on the US$1.9 trillion stimulus package in the coming days, which should hold gold’s appeal as inflation concerns and reflation appeal suggest gold is a good hedge.