Oil Extends Rally, Gold Vulnerable

Oil rallies in Asia

Oil prices finished last week on a firm note as ever-increasing natural gas prices continue to lift oil prices and coal prices as energy substitutes. With OPEC+ struggling to meet its present production targets and US shale production returning at a snail’s pace from last year, global energy woes are set to continue as the northern hemisphere winter approaches, leaving the case for higher oil constructive. Brent crude and WTI closing 1.0% higher at USD 78.00 and USD 73.95 a barrel.

With news over the weekend that China is enacting energy curbs by shuttering factories and other limits on heavy energy users, Asia is once again scrambling, helped along by the UK’s energy distribution woes and winter fears. Oil is once again sharply higher, Brent crude and WTI rallying by 1.20% to USD 79.00 and USD 74.85 a barrel, having been nearly 2.0% higher at one stage this morning.

Markets are nervous about supply constraints, no more so than Asia, which imports most of its energy needs. That alone should mean that price dips will have plenty of buyers queued up. Despite the Relative Strength Indexes (RSIs) moving close to overbought on both contracts, the fear index and physical demand equation indicated that an USD 80.00 handle on Brent crude will occur sooner rather than later. Next week’s OPEC+ JMMC meeting now assumes a far greater importance, although I do not expect OPEC+ to indicate any change to their present production plans.

Brent crude will have resistance at USD 79.50, the intra-day high, followed by USD 80.00 a barrel. It should then move quickly to USD 82.00, and a rally to the 2019 highs around USD 87.00 a barrel in the days ahead is not inconceivable. Brent crude’s technical picture remains constructive as long as prices remain above USD 76.00 a barrel.

Having risen through resistance at USD 74.20, WTI has traded as high as USD 75.30 intra-day, marking out initial resistance. Its next targets are USD 75.50 and USD 77.00 a barrel, a significant double top and the high of 2018 and 2021 which would likely see USD 80.00 tested quite quickly. Only a failure of USD 70.00 a barrel darkens the bullish technical outlook.

Gold lingers in limbo

Gold has risen in Asia today, but that is probably a coat-tailing move of the strong rallies in palladium and platinum this morning, itself a function of a decent rally industrial metals. On Friday, heightened fear sentiment continued to provide modest support to gold as it rose 0.47% to USD 1750.50 an ounce. In Asia, the broader commodity rally has lifted gold another 0.47% higher to USD 1758.50 an ounce even as Evergrande nerves have diminished.

Given that US yields and the US dollar have risen over the past week, always a negative for gold prices these days, it is a measure of the power of the commodity rally and the fear sentiment in markets that gold is now nearly 1.0% higher over the last two sessions. If Evergrande and China nerves continue easing, it is likely that gold will start to, once again, find headwinds.

Gold has support around USD 1740.00 an ounce, with resistance at USD 1780.00 an ounce. That range is likely to cover trading for the greater part of the week but I believe that gold’s rally remains fragile and a move lower to USD 1700.00 an ounce will eventually occur, especially if Fed tapering momentum rises.