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© Reuters
By Barani Krishnan
Investing.com – The big story for oil this week was not its near 7% drop in prices. The one-way virtual oil trade since late October had finally broken down; that was the real story.
For more than four months, oil prices rose largely in one direction, upward, as they were driven by OPEC + production cuts, the promise of economic reopens from Covid-19 shutdowns, and a huge relief from the pandemic in the US that was underway.
Anemic demand for airplanes and other transportation fuels was virtually overlooked as global travel remained severely restricted by the pandemic.
Europe’s constant struggle with new outbreaks of infections; its alarmingly slow rate of vaccinations; and the new confinements in the block were also treated with little seriousness.
Inconvenient queries for the bullish narrative were muted with data showing that oil inventories in the OECD group of developed countries were already close to five-year seasonal trends and will improve with even more production cuts, regardless of demand. . In fact, the underlying theme was that it was better not to talk about demand at all, given its subjectivity due to the pandemic.
In that environment, the price in New York, the benchmark for US crude, rose from just under $ 36 a barrel on October 30 to just under $ 68 on March 8. Listed in London, the world benchmark for oil went from less than $ 38 to slightly more. $ 71 in that same section.
If that wasn’t enough, Steven Kopits of Princeton Energy Advisors and Craig Johnson of Piper Sandler were asking for $ 100 a barrel, possibly by the end of the year. In fact, it is investment banks’ forecasts and their self-fulfilling prophecy (the more they repeat, the more they are believed) that pushed Brent past the $ 60 and $ 70 targets in the first two months of this year. .
But Kopits and Johnson had probably also forgotten about a certain Arjun Murti of Goldman Sachs who, in 2008, asked for oil for $ 200 when it was trading below 112 months before the financial crisis. We all know what happened after oil rose to $ 147 that year.
The fact of the matter is rooted in that golden quote: “Nothing is forever.”
There is also another saying: “It does not rain but it is pouring.”
Both were perfectly appropriate for oil this week, as all the awkward demand inquiries, leaking since the beginning of the year, turned into a perfect storm on Thursday.
Crude markets started the day with a deck traded with dollar-denominated commodities at November highs and US Treasury yields at 13-month highs. Then headlines about the largest daily increase in Covid-19 cases in Germany since January, a series of new lockdowns in Italy, and a growing vaccine crisis in the Eurozone hit traders’ screens. Suddenly, the ground under the oil gave way.
As the dust settled during the day, both WTI and Brent lost nearly $ 5 a barrel, their most since June 11.
However, for Friday’s session, the two benchmark indices recovered nearly $ 1.35 on average, as weakening bond yields and the dollar’s pullback from session highs led to a drop in buying. of oil.
But yesterday’s sell-off had already shattered the supposed invincibility of the four-month oil rally.
After Thursday’s slide, some oil bears were calling for a WTI in the low $ 50 and below $ 60 Brent.
For me, a more likely scenario is one of higher volatility, where new positives lift prices and negatives correct the foam. This is what you would expect from a normal market, one that has been practically non-existent in oil since October.
John Kilduff, a founding partner of Again Capital, a New York-based energy hedge fund, agrees.
“The magic of so-called one-way trade has been broken,” Kilduff said. “Now there is a reset to expectations, and that WTI below $ 60 is possible again if the market gets ahead of itself, with no supporting data.”
For now, oil has almost as many advantages as disadvantages.
The positives include the United States administering its first 100 millionth COVID-19 vaccine and the approval granted by the European drug regulator at the Oxford-AstraZeneca dose that at least a dozen countries in the bloc had stopped using for reasons of security.
Negatives include the upcoming refinery maintenance season that could boost US crude reserves, the possibility of more crude production in a politically unified Libya, and increased oil exports from a still-sanctioned Iran that could offset part. of bullish sentiment generated by the OPEC + cuts.
Technical charts also indicate more volatility going forward.
“Greater potential for WTI is subject to reaching $ 63.10,” said Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India. “Failure to do so could expose you to the risk of a low below the recent $ 58.23.”
In the case of gold, it posted a second consecutive weekly gain, indicating that investors in the yellow metal were adjusting to a rising dollar and raising US bond yields as the “new normal” they had to navigate in. environment of higher inflation.
“The next few months will be very difficult to identify what the main catalysts for bullion investors will be,” said Ed Moya, analyst at OANDA New York. “Wall Street will remain obsessed with the sell-off of the bond market and the recent disdain for tech stocks.”
Moya said gold was starting to attract investors’ attention because rising Treasury yields will eventually be offset by action from the Federal Reserve. “The index won’t be able to climb any higher if mega-cap tech stocks don’t pick up their pace and any hesitation in that trade should trigger some safe-haven flows into gold.”
For decades, gold was touted as the best store of value when there were concerns about inflation. However, in recent months, it was deliberately prevented from being the go-to asset for investors, as Wall Street banks, hedge funds and other players shorted the metal as US bond yields soared and, in turn, change, the dollar.
Bond yields have soared on the grounds that the economic recovery in the coming months could extend beyond the Fed’s expectations, causing inflation to spiral as the central bank insists on holding rates down. interest close to zero.
The dollar, which normally falls in an environment of greater inflationary fears, also recovered instead with the same logic of uncontrolled economic recovery. The dollar’s status as a reserve currency has strengthened its position as a safe haven, leading to the construction of new long positions in the dollar.
Rising dollar and bond yields have been anathema to gold, forcing the yellow metal to lose 17% from all-time highs of nearly $ 2,100 in August. Any hint from the Fed that it will step up bond buying in the coming months could be just what it would do to suppress yields and trigger a rally in gold.
But Fed Chairman Jay Powell in his monthly press conference on Wednesday declined to give any indication that the central bank will increase its purchases of Treasuries.
Powell said that as the year progresses, the U.S. unemployment rate is likely to decline from 6.2% in February, while inflation expands 2.4% amid an overall 6.5% growth in GDP expected in an economy recovering from a 2020 pandemic.
Therefore, it will be a wait to see more adjustments in Fed policy, he said.
Gold is in a better position now, rising 0.7% so far this month, after falling 9% from January to February. But its return to $ 1,800 and more will also be a wait from the Fed and the S&P.
Gold price and market overview
the New York Comex made a final trade of $ 1,743.90 before the week. It closed the official session on Friday at $ 1,741.70, an increase of $ 9.20 or 0.5%.
During the week, the benchmark gold futures contract gained 1.3%, similar to the previous week. In the previous three weeks, gold futures fell consecutively, leaving longs in the yellow metals almost 7% poorer.
The value of gold, which fund managers sometimes rely on for direction more than futures, closed at $ 1,745.40 on Friday, an increase of $ 8.68 or 0.5%. It was up 1.0% on the week, adding to the 1.5% gain from the prior week.
Oil price and market overview
The reference price for US crude, quoted in New York, made a final trade of $ 61.46 before the weekend. It closed Friday’s session at $ 61.42, an increase of $ 1.42 or 2.4%. However, during the week, the WTI fell 6.4%.
The London price, the world benchmark for oil, made a final trade of $ 64.55 per barrel before the weekend. It closed Friday’s session at $ 64.53, an increase of $ 1.25 or 2%. During the week, Brent lost 6.8%.
Calendar of energy markets ahead
Monday March 22
Cushing Private Reserve Estimates
Tuesday 23 March
weekly report on oil reserves.
Wednesday March 24
EIA weekly report on
EIA weekly report on
EIA weekly report on
Thursday March 25
EIA weekly report on {{ecl-386 || natural gas storage}
Friday March 26
Baker Hughes Weekly Survey of
Disclaimer: Barani Krishnan does not occupy a position on the commodities and securities that he writes about.
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