Oil Rally Fizzles, Gold Stays Steady

Fundamental analysis of Forex market

Oil impressive overnight rally peters out

Oil prices rocketed higher overnight, as Hurricane Laura worries and a dramatic fall by 4.4 million barrels for US Crude Inventories provoked an aggressive short squeeze of speculative positioning. Brent crude rose 4.0% to USD42.50 a barrel, with WTI leaping 4.7% to USD40.15 a barrel. Weather and inventory related data have, for now, given oil prices a stay of execution, with both contracts up some 8.0% over the past sessions.

The fall in US equity index futures in Asia has provoked a mechanical reaction on oil markets as the US dollar has risen. Both Brent and WTI are 1.25% lower at USD41.75 and USD39.65 a barrel, respectively. However, this is not an oil move; instead, it is an equity move and the fall in Asia today should be taken with a grain of salt.

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From a technical perspective, Brent crudes 100-day moving average (DMA, today at USD40.60 a barrel, has successfully supported prices over the past week. Each selloff having been stopped at this point. The USD40.60 level today, therefore, is a critical pivot point for Brent prices. A daily close below will signal that Brent’s selloff is resuming. Resistance remains distant at Brent crude’s 200-DMA at USD44.00 a barrel.

WTI has also received strong technical support from its 100-DMA over the past week, today at USD37.90 a barrel. Like Brent, it forms a critical pivot point now, with a daily close underneath signalling the resumption of WTI’s selloff, targeting USD34.50 a barrel. Overnight though, WTI stopped at its 200-DMA at USD40.30 a barrel. A rise through this point today signals the rally could extend to USD42.00 a barrel.

None of the structural factors that pulled the rug from under oil prices has fundamentally changed in the past two days—the rally in oil prices driven by environmental and short-term supply factors in the United States. With oil around 8.0% higher over the past two sessions, further gains and bullish exuberance should be treated with caution. Short-term moves today will be dictated by US equity futures.

Gold settles back into the middle of its range

Gold prices rallied overnight but were capped by descending trendline resistance at USD1965.00. After that, post the FOMC, equity weakness and US dollar strength saw gold move lower to finish almost unchanged at USD1959.50 an ounce. With Asia slavishly using US equity index futures for trading direction, gold has fallen by nearly 1.0% to USD1940.00 an ounce.

The yellow metal’s fall leaves it marooned mid-range between support at USD1920.00 an ounce, and the trendline resistance, today at USD1963.00 an ounce. What is clear is that gold’s price action is being dictated by movements in other asset classes such as currencies, and not by gold itself. As such, it lacks the momentum to challenge either side of its current trading range seriously.

Gold’s trading range is narrowing though, which hints that a breakout is coming. At this stage, given the strength of support evident in the USD1900.00 to USD1920.00 an ounce region, the next move remains most likely to be higher, although it will find resistance at USD2000.00 an ounce. Gold’s longer-term bullish fundamentals are unchanged. What has changed is investors’ propensity to chase prices higher for now.