© Reuters
By Barani Krishnan
Investing.com – The big story in oil this week was not the price drop of almost 7%. The virtual one-way trade in crude oil since the end of October was finally broken; it was the real story.
For more than four months, oil prices have largely gone in one direction – driven by OPEC +’s production cuts, the promise of economic reopening due to the closure of Covid-19 and a major easing of the ongoing US pandemic .
The anemic demand for aircraft and other transportation fuels is virtually overlooked, as global travel has been severely curtailed by the pandemic.
Europe’s ongoing battle with new outbreaks of infections; his disturbing rate of vaccinations; and fresh connections on the block were also treated with little seriousness.
Inquiries that make the Bull narrative uncomfortable have been detected by data showing that oil supplies in the OECD group of developed countries have been seasonal trends for almost five years, and that they will improve with even more production cuts. In fact, the underlying theme was that it was better not to talk about the question at all, given the subjectivity due to the pandemic.
In that area, the New York-traded US crude oil benchmark rose from just under $ 36 a barrel on Oct. 30 to just under $ 68 by March 8. The global benchmark for oil traded in London from under $ 38 to just over $ 71 in the same piece.
If that wasn’t enough, Steven Kopits of Princeton Energy Advisors and Craig Johnson of Piper Sandler asked for $ 100 a barrel, possibly by the end of the year. In fact, it is the predictions of investment banks and their self-fulfilling prophecy – the more they are repeated, the more they are believed – that Brent took outside the $ 60 and $ 70 targets within the first two months of this year.
But Kopits and Johnson probably also forgot about a certain Arjun Murti of Goldman Sachs, who asked for $ 200 oil in 2008 when he traded less than $ 112 months before the financial crisis. We all know what happened after oil cost $ 147 that year.
The fact is captured in that golden quote: “Nothing goes on forever”.
There is also another saying: ‘It does not rain, but it rains’.
Both were perfectly fit for oil this week, as all the awkward inquiries about demand, which has been pouring in since the beginning of the year, turned into a perfect storm on Thursday.
Crude markets began the day with a sledgehammer awarded in dollar-denominated products with a November high and US Treasury yields at 13-month highs. Headlines about Germany’s biggest one-day increase in Covid-19 cases since January, a spate of new closures in Italy and a growing vaccine crisis in the Eurozone have jumped on the screens of crude traders. Suddenly the floor gave way under oil.
As the dust settled for the day, both WTI and Brent lost nearly $ 5 a barrel – the most since June 11th.
By Friday’s session, however, the two benchmarks had recovered an average of nearly $ 1.35, as the weakening of yields and a dollar falling back from the highest sessions caused the purchase of oil on the valley.
But the sell-off of the previous day had already broken the so-called invincibility of the four-month-long oil rally.
After the tumble on Thursday, a few oil bears demanded WTI in the low $ 50s and below $ 60 in Brent.
For me, a more likely scenario is a higher volatility, where fresh positive prices increase and negative corrects the foam. This is what you would expect from a normal market – one that has virtually ceased to exist in oil since October.
John Kilduff, founding partner of Again Capital, an energy hedge fund in New York, agrees.
“The magic of the so-called one-way trade has been broken,” Kilduff said. “There is now a recovery in expectations, and it is possible again under $ 60 WTI if the market comes to itself, without supporting data.”
For now, there are almost as many disadvantages to oil as there are disadvantages.
The positive aspects include the United States administering its first 100 million COVID-19 vaccine and the approval given by the European Medicines Regulator to the dose of Oxford-AstraZeneca which has stopped using at least a dozen countries in the block due to safety.
The downsides include the upcoming season for the maintenance of the refinery that could increase U.S. crude supplies, the possibility of more crude production in a politically united Libya and higher exports of oil from Iran still being approved, which fuels some of the bullish sentiment which can be offset by the OPEC + cuts.
Technical charts also indicate more volatility ahead.
“Further upside for WTI is subject to it reaching $ 63.10,” said Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India. “Failure to do so could lead to a risk of a bottom below the recent $ 58.23.”
In the case of gold, it made a second weekly profit, indicating that investors in the yellow metal were adjusted for a rising dollar and US bond yields increased as the ‘new norm’ they had to navigate amid the higher inflation environment.
“The next few months will be very difficult to identify what the key catalysts for investors will be,” said OANDA analyst Ed Moya in New York. “Wall Street will stand firm on the sales of the bond market and the recent contempt for technological stocks.”
Moya said gold is starting to attract some attention from investors as the Treasury’s rising returns will eventually be offset by the Federal Reserve. “The index will not be able to climb higher if technology stocks with large capital do not regain their grip and any hesitation in trading could cause a safe haven in gold.”
Over the decades, gold was considered the best value store when there was concern about inflation. In recent months, however, it has been deliberately prevented from being the investor, as Wall Street banks, hedge funds and other players have curtailed the metal, while U.S. yields from the bonds and the dollar have rather increased.
Yields have risen on the argument that economic recovery could extend beyond the Fed’s expectations in the coming months, leading to rising inflation as the central bank insists on keeping interest rates close to zero.
The dollar, which usually falls in an environment of heightened inflation fears, has also risen on the same runaway economic logic. The status of the greenback as a reserve currency strengthened its position as a safe haven, which led to new long positions being built in the dollar.
Rising dollar and bond yields were an anathema to gold, forcing the yellow metal to lose 17% at a record high of nearly $ 2,100 in August. Any indications by the Fed that it will intensify the purchase of bonds in the coming months may just be the thing to limit yields and cause a rise in gold.
But Fed Chairman Jay Powell declined to give any indication of the central bank’s contribution to its treasury purchases during its monthly news conference on Wednesday.
Powell said U.S. unemployment rates are likely to fall from 6.2% in February over the course of the year, while inflation increased 2.4% amid overall 6.5% GDP growth which expected in an economy that will bounce back from a pandemic-stricken 2020.
It would therefore be an anticipation for further tampering with Fed policy, he said.
Gold is now in a better position, rising 0.7% monthly after falling 9% in January to February. But the return to $ 1,800 and more will also be the Fed and the S&P.
Gold price and market assignment
on New York’s Comex made a final trade of $ 1,743.90 before the week. It rose Friday’s official session at $ 1,741.70, up $ 9.20 or 0.5%.
For the week, the standard futures contract for gold rose 1.3%, similar to the previous week. In three preceding weeks, gold futures have fallen steadily, and the demand in the yellow metals is almost 7% poorer.
Gold, on which fund managers sometimes rely more than futures, rose to $ 1,745.40, $ 8.68 or 0.5% on Friday. It rose 1.0% this week, contributing to the previous week’s gain of 1.5%.
Oil price and market assignment
New York traded, the benchmark for U.S. crude oil, made a final trade of $ 61.46 before the weekend. It rose Friday’s session to $ 61.42, $ 1.42, or 2.4%. For the week, however, WTI fell 6.4%.
London, the global oil benchmark, made a final trade of $ 64.55 a barrel before the weekend. It rose Friday’s session to $ 64.53, by $ 1.25, or 2%. For the week, Brent lost 6.8%.
Energy Markets Calendar ahead
Monday 22 March
Private Cushing Stocks
Tuesday 23 March
weekly report on oil supplies.
Wednesday 24 March
EIA weekly report on
EIA weekly report on
EIA weekly report on
Thursday 25 March
EIA weekly report on {{ecl-386 || natural gas storage}
Friday 26 March
Baker Hughes weekly survey on
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.