Crude inventories propel oil higher

Oil prices performed strongly again overnight, with Brent crude rising 2.10% to USD48.80 a barrel, and WTI increasing 2.45% to USD45.85 a barrel. In Asia, prices continue to edge higher, both contracts adding 10 cents a barrel.

The main driver for oil’s rally, which came despite profit-taking in other markets, was the surprise fall in official US Crude Inventories. They fell by 754,000 barrels with Cushing Crude Stocks falling by a massive 1.721 million barrels. That was enough to greenlight another bout of speculative buying from a market that totally ignored the unexpected climb in US API Crude Inventories on Tuesday because it didn’t fit the narrative they wanted to see.

The tunnel vision shown by energy markets should be a warning sign that the rally is running on speculative vapours at these levels, with both Brent and WTI’s relative strength indices (RSI) now in solidly overbought territory. If the odds of a sharp correction to the bull-market rally were high yesterday, they have risen substantially today, especially with liquidity reduced due to the US holiday.

Markets also noted that January delivery crude orders from China and India had spiked higher overnight. However, I suspect that in China’s case it was because private refiners have received new 2021 quotas. Markets also face a substantial risk from Monday’s OPEC+ meeting with Iraq joining the UAE in making fractious noises about the compliance of other members – read Russia- and the unfairness of quota allocation. Although I expect OPEC+ to extend their cuts, we may get a surprise reduction in size or a shortening of the time frame. As ever, unity is strong when oil prices are collapsing, but much less so when oil rises strongly, and dollar signs start flashing in the eyes of OPEC+ members.

The charts show no resistance in Brent crude until USD54.00 a barrel from here, but conversely, no material support until the USD46.50 a barrel region. WTI has resistance at USD48.50 a barrel, but no real support until the USD44.00 a barrel break-out zone. Although the tightening of the futures calendar spreads, and vaccine and economic recovery hopes are all valid reasons to be optimistic about oil, it has travelled an enormous distance in a short time. The overnight move looked entirely speculative. Oil may resolve higher via a large dip in prices first.

Gold hovers above critical support

The overnight price action seen elsewhere did gold no real favours as it finished unchanged at USD1808.00 an ounce. Gold has scraped a three-dollar gain to USD1811.00 an ounce in Asia, but that still leaves it perilously close to the critical support at its 200-day moving average (DMA), just below at USD1798.00 an ounce.

A weekly close below the 200-DMA suggests that gold’s banishment will continue, and it could potentially fall to v1680.00 an ounce. Gold ETF flows have accelerated in recent times, and central bank buying has also materially reduced. All of which increases the risks of further losses.

The FOMC may come to gold’s rescue in December if they move to cap US yields in the 10-year plus tenors. That is an age away though for investors that are long now. With financial markets pricing in a vaccine-led global recovery and expanded US fiscal stimulus, causing US longer yields to rise, gold will find no solace from a weaker US dollar.

One hope is that gold’s RSI is hovering just above oversold territory, which has been an excellent corrective indicator this year. In this environment, though, gold recovery is likely to be limited to the USD1840.00 to USD1850.00 an ounce region.