Oil continues to suffer recovery nerves

The weaker than expected US Retail Sales data and ensuing US dollar strength weighed further on oil prices overnight. Confidence is being weakened anyway by softer China data earlier in the week and ratcheting fears that the Covid-19 delta-variant will erode the pace of the global recovery, and thus, future oil demand. US API Crude Inventories dropped by 1.163 million barrels overnight, but that seemed only to stem the negative tide, not turn it. Nor has OPEC+’s refusal to head President Biden’s call to pump more to lower prices proved supportive.

Brent crude eased 0.66% lower to USD 69.10 a barrel overnight, while WTI retreated by 1.25% to USD 66.55 a barrel. Oil prices are steady this morning in Asia, being almost unchanged from overnight. Notably, both contracts remained below their 100-day moving averages (DMAs), while the relative strength indexes (RSIs) remain neutral, bearish technical developments.

Brent crude has resistance at USD 70.00 and then the 100-DMA at USD 70.50 a barrel. That is followed by USD 71.35 and USD 72.00 a barrel. It has support nearby at the overnight low of USD 68.85, followed by USD 68.20 and then USD 67.50 a barrel. Failure opens a test of triple bottom support at USD 64.60 a barrel.

WTI has resistance at the overnight high at USD 67.75, closely followed by the 100-DMA, located at USD 67.80 a barrel. We then have USD 69.60 and USD 70.00 a barrel. Support is nearby at the overnight low of USD 66.35, followed by USD 65.75, and then the more critical double bottom at USD 65.10 a barrel. Failure opens a chasm that could target USD 62.00 a barrel in the sessions ahead.

Both contracts rallied intra-session overnight, only to fail ahead of their respective 100-DMAs, reinforcing their near-term importance. Both contracts appear to be tracing out bearish pennant formations, suggesting prices could fall substantially from here. I will await tonight’s official US crude inventory data and the FOMC minutes before finalising my thoughts on that tomorrow.

Gold shows haven resilience

Gold appears to be finally trading off something that doesn’t resemble a mechanic inverse relationship to the US dollar. Despite the greenback recording substantial gains overnight, gold held onto all of its gains of the past few sessions, finishing only 0.06% lower at USD 1786.00 an ounce.

It looks like, for now, the safe-haven bid is back. Increasing nerves about the delta variant’s impact on the global recovery is finally starting to weigh on equity markets, with at least some of those funds parked in the yellow metal. At the periphery, concerns about the transition of power in Afghanistan and its implications for regional stability may also be strengthening gold’s hand. Weaker than expected, recent China data and the impact of partial port shutdowns there on global supply chains are another tailwind.

Nevertheless, gold will face more challenges to its rally if the US dollar keeps strengthening. More importantly, if US long-dated bond yields start to rise, I doubt gold’s upward momentum will be maintained.

Some risk aversion buying is evident in Asia today, as gold firms by 0.16% to USD 1789.00 an ounce. However, from a technical perspective, gold faces a series of formidable resistance levels from here on up. Gold has initial resistance at the overnight highs at USD 1797.00, which is also the 50-DMA. That is followed by USD 1800.00 an ounce and then the 100-DMA at USD 1807.50 an ounce, ahead of the 200-DMA at USD 1813.20 an ounce. After that comes before a series of daily highs, each side of USD 1834.00 an ounce.

Support resides at the overnight lows around USD 1780.00, followed by USD 1770.00 and then the important pivot region at USD 1750.00 an ounce. Failure of USD 1750.00 implies a deeper retreat to USD 1700.00 an ounce.

Although gold has maintained its risk-aversion bid overnight, the technical picture suggests it has a lot of wood to chop on the upside to sustain the rally’s momentum. I, therefore, maintain a cautious stance on further gold strength at these levels if the US dollar remains as firm as it is at the moment.