Oil falls on concerns over recession in Europe

Oil endured another torrid overnight session, with both Brent and WTI crushed as fears increase of a double-dip recession in Europe. Brent crude fell 2.90% to USD40.45 a barrel overnight, with WTI falling 2.90% to USD38.60 a barrel. With Covid-19 rampant across America and Europe, the 2021 consumption picture is becoming cloudy, complicated by the planned 2 million barrel a day increase by OPEC+ in January, and the return of full Libyan production. Markets entirely ignored new sanctions on Iran oil companies overnight by the US.

Profit-taking on US dollar longs from overnight has seen greenback edge lower in Asia, giving oil a short-term boost, with both contracts rising 0.55% to USD40.70 and USD38.75 a barrel today. Hurricane Zeta is due to make landfall in the US gulf states later tomorrow and may also be providing some price support. As of now though, it is merely a Level-1 hurricane, and unlikely to materially affect US oil production and refining. Its effects, if any, are likely to be transitory.

Oil’s price risks remain skewed to the downside, despite the scale of the sell-off of the past two days. Brent crude carved through its 200-day moving average (DMA) at USD41.15 overnight. It now becomes resistance followed by the USD41.40 a barrel region. The overnight low at USD40.25 a barrel forms initial support, with nothing until USD39.00 a barrel after that. WTI has resistance at USD39.20 a barrel with support at overnight low at USD38.30 a barrel, and then its 200-DMA at USD37.45 a barrel. Both relative strength indices are neutral, meaning that oil’s downside is in no danger of becoming oversold.

Although OPEC+ will be looking on with concern, I believe it will take a sustained break by Brent crude of USD35.00 a barrel to force their hand to roll back production increases. Much will depend on Europe’s Covid-19 battle in the coming weeks.

Gold’s price action shows strength

Both gold and silver have been slowly compressing their daily ranges in symmetrical triangles these past two-months, implying that large price breakouts are coming. Overnight gold survived a test of the downside of the triangle at USD1899.00 an ounce, rallying even as equity markets fell violently and the US dollar strengthened. Gold finished unchanged at USD1902.00 an ounce. The fall in US Treasury yields will have helped, but there was an undeniable durability in gold’s price action overnight. It suggests that US election risk-hedging is starting to pick up momentum.

Gold has rallied again in Asia, rising 0.30% to USD1908.00 an ounce. The top and bottom of the triangle today are at USD1924.00 an ounce, and USD1902.00 an ounce respectively. The 50-DMA at USD1919.60 an ounce, and the 200-DMA below at USD1885.00 an ounce provides interim support and resistance.

With gold’s and silver’s ranges compressing ever tighter, a breakout by both is likely only days away. The author’s view is that pre-election risk hedging, and the possibly tumultuous days after, means a large upside move is the more likely. Longer-term readers may look at my track record as a leading reverse market indicator though, and just accept that a large move is coming, ignoring my directional thoughts. I don’t blame you; market intelligence comes in all forms.