© Reuters
By Barani Krishnan
Investing.com – The big oil story this week was not the 7% price drop. The unilateral virtual oil trade since the end of October has finally been disrupted; that was the real story.
For more than four months, oil prices have been largely in one direction – upwards – as they have been driven by OPEC + production cuts, the promise of an economic reopening of the closure of Covid-19 and a pandemic US relief from success that was underway.
Practically overlooked was the anemic demand for fuel for airplanes and other means of transport, as global travel remained severely reduced by the pandemic.
Europe’s constant struggle with new outbreaks of infections; its alarmingly slow rate of vaccinations; and new blockages in the block were also treated with little seriousness.
Inconvenient questions for the bull’s narrative were drowned out with data showing that oil stocks in the OECD group of developed countries were already close to five-year seasonal trends and will improve with further cuts in production, not to mention demand. In fact, the underlying theme was that it was better not to talk about demand, given its subjectivity due to the pandemic.
In this environment, traded in New York, the benchmark for US oil rose from just under $ 36 per barrel on October 30 to just under $ 68 on March 8. Traded in London, the global benchmark for oil went from less than $ 38 to just over $ 71 in the same stretch.
If that weren’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 the investment banks’ predictions and self-fulfilling prophecies – the more they repeat, the more they are believed – that pushed Brent beyond the $ 60 and $ 70 targets in the first two months of this year.
But Kopits and Johnson probably also forgot a certain Arjun Murti from Goldman Sachs who, in 2008, asked for $ 200 for oil when it was being traded less than $ 112 months before the financial crisis. We all know what happened after oil reached $ 147 that year.
The fact is rooted in that golden quote: “Nothing goes on forever”.
There is also another saying: “It doesn’t rain, it rains”.
Both were perfectly suited for oil this week, as all the uncomfortable doubts about demand, dripping since the beginning of the year, turned into a perfect storm on Thursday.
The oil markets started the day with a sledge hammer traded on dollar-denominated commodities in November highs and U.S. Treasury yields at peaks of 13 months. Then, headlines about Germany’s biggest one-day rise in Covid-19 cases since January, a wave of new blockades in Italy and a growing vaccine crisis across the eurozone have leapt onto the screens of crude oil dealers . Suddenly, the floor under the oil gave way.
As the dust settled that day, WTI and Brent lost nearly $ 5 a barrel – the highest since June 11.
In Friday’s session, however, the two benchmarks recovered nearly $ 1.35 on average, with weakening bond yields and a dollar retreating from session highs, prompting bearish oil purchases.
But the liquidation of the previous day had already destroyed the so-called four-month invincibility of the rise in oil prices.
After Thursday’s crash, some oil bears were asking for WTI at low $ 50s and Brent below $ 60.
For me, a more likely scenario is that of greater volatility, where the new positives increase prices and the negative ones correct the foam. It is what you would expect from a normal market – a market that has hardly existed in the oil sector since October.
John Kilduff, founding partner of Again Capital, a New York-based energy hedge fund, agrees.
“The magic of so-called unilateral trade has been broken,” said Kilduff. “There is a readjustment of expectations now, and below $ 60 WTI it is possible again if the market moves ahead, without 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 given by the European drug regulator to the Oxford-AstraZeneca dose that at least a dozen countries in the bloc have stopped using for safety reasons.
Negatives include the refinery’s upcoming maintenance season that could increase U.S. oil stocks, the possibility of more oil production in a politically unified Libya and higher sanctioned Iranian oil exports, which could offset some of the upbeat sentiment. delivered by OPEC + cuts.
Technical charts also indicate more volatility ahead.
“Other advantages for WTI are subject to reaching $ 63.10,” said Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India. “If you don’t, you risk falling below the recent $ 58.23.”
In the case of gold, it recorded a second consecutive weekly gain, indicating that investors in the yellow metal were adjusting to a rising dollar and increasing US bond yields as the “new normal” that they had to navigate amid a higher inflation environment.
“The coming months will be very complicated to identify what will be the main catalysts for gold investors,” said Ed Moya, an analyst at OANDA in New York. “Wall Street will remain obsessed with the liquidation of the bond market and the recent disdain for technology stocks.”
Moya said that gold is starting to gain some attention from investors because the increase in Treasury yields will eventually be offset by Federal Reserve shares. “The index will not be able to rise if mega-cap technology stocks do not pick up and any hesitation in that trade should trigger some safe haven flows for gold.”
For decades, gold was singled out as the best store of value whenever there were concerns about inflation. Still, in recent months, it has been deliberately prevented from being investors’ favorite asset, as Wall Street banks, hedge funds and other players have opened up the market at the same time as increasing US bond yields and the dollar .
Bond yields have increased on the grounds that the economic recovery in the coming months may extend beyond the Fed’s expectations, leading to an inflationary spiral as the central bank insists on keeping interest rates close to zero.
The dollar, which normally falls in an environment of greater inflation fears, also recovered in the same logic of uncontrolled economic recovery. The dollar’s status as a reserve currency strengthened its position as a safe haven, leading to new long positions being built in dollars.
The rise in dollar and bond yields has been anathema to gold, forcing yellow metal to lose 17% from record highs of almost $ 2,100 in August. Any indication by the Fed that it will step up bond buying in the coming months may be just the thing to curb yields and trigger a gold surge.
But Fed Chairman Jay Powell, at his monthly news conference on Wednesday, declined to give any indication that the central bank is increasing its Treasury purchases.
Powell said that as the year progresses, the US unemployment rate is likely to fall from February’s 6.2%, while inflation expands 2.4% amid overall 6.5% GDP growth expected in an economy that is recovering from a 2020 pandemic.
So it will be a wait to see further adjustments to the Fed’s policy, he said.
Gold is in a better position now, rising 0.7% in the month, after falling 9% from January to February. But his return to $ 1,800 and beyond will also be a wait to see the Fed and S&P.
Gold price and market summary
at New York’s Comex, he made a final trade of $ 1,743.90 before the week. Friday’s official session ended at $ 1,741.70, up $ 9.20 or 0.5%.
For 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 long positions in yellow metals nearly 7% poorer.
The gold value, which fund managers sometimes depend on for guidance more than futures, closed on Friday at $ 1,745.40, up $ 8.68 or 0.5%. It rose 1.0% in the week, adding to the 1.5% gain from the previous week.
Oil prices and market summary
The New York market, the benchmark for U.S. oil, made a final trade of $ 61.46 before the weekend. Friday’s session ended at $ 61.42, up $ 1.42, or 2.4%. On the week, however, WTI fell 6.4%.
The London market, a global benchmark for oil, made a final trade of $ 64.55 a barrel before the weekend. Friday’s session ended at $ 64.53, up $ 1.25 or 2%. During the week, Brent lost 6.8%.
Calendar of energy markets ahead
Monday, March 22
Cushing’s private stock estimates
Tuesday, March 23
weekly report on oil stocks.
Wednesday, March 24
Weekly EIA report on
Weekly EIA report on
Weekly EIA report on
Thursday, March 25
Weekly EIA report on {{ecl-386 || natural gas storage}
Friday, March 26
Baker Hughes weekly survey on
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.