Beware oil rallies bearing gifts

Oil prices have hitched a ride aboard the Biden bandwagon this morning, after enduring a torrid session on Friday. Both Brent crude and WTI have erased the losses of Friday. Brent crude and WTI have leapt 2.15% to USD40.50 and USD38.20 a barrel respectively. Despite the rallies this morning, in the bigger picture, prices have only moved to the middle of their respective two-month ranges.

Although OPEC+ will be relieved, caution should be exercised about oil rallies bearing gifts. Libyan production has returned to 1 million barrels per day (they are exempted from the OPEC+ cuts), and a Biden presidency may be more conciliatory towards Iran. An increase in Iranian oil to international markets would undoubtedly be a negative price development.

Even without that theory, the US and Europe are facing renewed slowdowns inactivity, and therefore consumption, due to the Covid-19 pandemic. National lockdowns in Europe, and potentially escalating restriction in America will be a dragging anchor on sustained price increases. China alone cannot carry oil markets, and in fact, are quite happy to wait for dips in prices. Even with a weaker US dollar, oil’s base case does not support materially higher oil prices.

Rallies in Brent above USD43.00 a barrel, and above USD42.00 for WTI, should come with hazardous road conditions ahead/accident black spot signs.

Gold rides the Biden call higher

With the Biden call option lifting every market except the US dollar today seemingly, gold has also rallied. Gold has climbed 0.60% higher to USD1963.00 an ounce this morning, having broken multi-month trendline resistance at USD1913.40 an ounce last Thursday.

With the US dollar set to sink further over the coming months as the Federal Reserve eases more, the return of the asset price appreciation trade should continue to lift gold. One caveat on this outlook is gold has yet to demonstrate it can withstand an equity sell-off in recent times. Unless gold can break this correlation, an unexpected drop in equities, even in the short-term, could still break bullish hearts and cause gut-wrenching swings in P&L.

Having noted that risk to the underlying bullish picture, the technical picture suggests that gold is on track for more gains this week. Gold has initial resistance at USD1975.00 an ounce, followed by USD2000.00 an ounce. I would expect option and algorithmic stop-losses to lie just above that level. A break of USD2000.00 clears the road for a retest of the August highs around USD2075.00 an ounce, assuming equity markets also remain stampeding bulls.

Support lies at USD1937.00 an ounce followed by the long-term breakout at USD1913.40 an ounce. From a short-term perspective, those support levels are quite some distance away and will be emotional for buyers late to the rally. But such is the world we live in; deep pockets and steely nerves are a must. Those with lower tolerances for pain, should probably watch equity markets for short-term warning signals.