Is the oil rally already fraying?
Crude’s fifth straight week of gains means that whatever upward momentum oil has from hereon in may be limited, despite the continued feel-good narrative on COVID-19 vaccines.
In Asian trading on Monday, US crude’s West Texas Intermediate and London’s Brent slid 0.4% by 2:00 PM in Singapore (1:00 AM ET) as a continued surge in global coronavirus cases forced a series of renewed lockdowns}}, including in Southern California in the United States.
It was yet another sign that oil was having trouble extending the run-up that began on Dec. 9 after a trinity of COVID-19 vaccine makers, led by Pfizer (NYSE:PFE), suggested doses of their vaccine may be available as early as this week.
Lockdowns aside, those long oil have always had another problem: OPEC.
The Organization of the Petroleum Exporting Countries, which exists to get the best prices and market opportunities for its members, doesn’t always live up to the expectations of oil bulls.
When it does—like last week when it agreed to hike output by just 500,000 barrels per day (bpd) from January instead of 2 million bpd—OPEC can act in a way that is worthy of applause.
But the cartel can also disappoint when it matters most. And the disappointment can come from any of the 13 members of the Saudi-steered OPEC or its broader OPEC+ iteration, which includes 10 allies led by Russia.
Few will forget the clash between Saudi and Russia that led to the March crash which took WTI to its first-ever negative pricing, dropping to minus $40 per barrel.
In the latest case, barely after it looked like OPEC had the market in its corner following Thursday’s stage-managed production hike announcement, talk surfaced by the weekend that founding member Iran will likely max output in the new year.
Reuters, citing Iranian state media, reported on Sunday that Tehran had instructed its oil ministry to prepare installations for production and sale of crude oil at full capacity within three months, ahead of a possible easing of US sanctions after President-elect Joseph Biden takes office on Jan. 20.
The report suggested that President Hassan Rouhani was eager to bring Iran’s output back to the 2-million bpd level seen in 2018, before the Trump administration exited the six-nation nuclear deal with Tehran and reimposed sanctions that hit the economy hard.
There has been much speculation of an imminent return of Iranian oil to the market in the event of a Biden presidency.
What surprised though was Iran’s tacit approval last week of the modest OPEC+ production hike, even as it was working behind the scenes to pump like there’s no tomorrow.
As I’ve asked in previous posts—and still get spooked every now and then by the mind games played by the Iranians and their just as (or probably more) crafty Saudi rivals—why should anyone trust OPEC?
In the six decades it’s been around, the cartel has a history of often being long on promise and short on delivery—notwithstanding its best-ever compliance on production cuts forced by the coronavirus pandemic over the past six months.
If Iran does end up doing a number on the Saudis, it won’t be the first and last time that an OPEC member has said one thing and done another.
Also, the Islamic Republic can barely be faulted for its apparent dishonesty—when the Saudis gleefully allowed the Trump regime to extract “maximum pain” on Tehran over the past two years without a care for the economy of an equitable OPEC member.
In the precious metals corner, with gold having just one week of gains compared with oil’s five, there might be a chance for the yellow metal to extend its run.
In Asian trading Monday, gold for February delivery on New York’s COMEX hovered at nearly $1,845 an ounce, up about $4 or 0.2%.
Some analysts think the most optimistic case for the yellow metal now is a break to $1,880 and beyond. For this, much will depend on how the haven crowd responds to the economic stimulus narrative coming from Biden’s office.
On Friday, Biden called for stimulus worth “hundreds of billions of dollars” to pull the US economy through 2021. Senate Republicans, who did their best to stymie substantial COVID-19 related spending after the first $3 trillion approved under the Coronavirus Aid, Relief and Economic Security (CARES) Act in March, look cornered into agreeing to at least a $908 billion bipartisan deal.
It should not be forgotten that it was the CARES Act and subsequent—but unrealized—promises of stimulus that pushed gold to record highs of $2,000 and above in March. More fiscal relief and weakening of the dollar could be what the yellow metal needs now for rejuvenation.
Beyond what the Biden administration does, the Federal Reserve is also planning a deep-dive into bond-buying after seeing November’s unsettling nonfarm payrolls that showed just 245,000 jobs being added versus expectations for a 470,000 gain.
“COVID lockdowns and restrictive measures are risking permanent scarring to the labor market and that will keep the Fed remaining ultra-accommodative,” Ed Moya, senior market strategist at OANDA in New York, said Friday.
Even so, for gold, there are arguments on whether it has hit a wall between $1,835 and $1,850, after rallying hard from below $1,770.
Also, two other things need to stay down for gold to go higher: the dollar—which is already at multi-year lows—and {{23705|US Treasury yields.
If an asset rotation suddenly happens, money could flee overbought stocks—including gold—to go into bonds instead.
“Gold's body language shows its willingness to cross into the right side of $1,900, but at the same time, technical factors call for caution,” said Sunil Kumar Dixit of Kolkata, India-based SK Dixit Charting.
“As expected, the precious metal is facing stiff resistance at $1,848 and Stochastic RSI (Relative Strength Indicator) negativity can cause some intraday correction to $1,830-$1,818. Buyers may come in at the test of $1,818-$1,820 areas and a consolidation may help gold to rally again, breaching $1,848 and reaching out to $1,866-$1,870.”