By Barani Krishnan
Investing.com - Fasten your seat-belts: The Covid “safe play” versus “lockdown trade” could see gut-wrenching swings in oil and gold prices in the coming weeks as hopes over vaccines and therapeutics face off with potential stay-home orders as hospital ICUs get overrun.
The just-ended week gives us a preview of what the “new normal” could be.
Investor over-exuberance with progress reported by Pfizer (NYSE:PFE) on its Covid-19 vaccine trials triggered a massive rally in risk assets on Monday. It gave Wall Street’s Dow a 3% boost — its biggest one-day gain since June. And crude oil an 8% advance, the largest since May.
But as the week wore on, the extremely challenging storage conditions for the Pfizer vaccine, as well as delivery logistics, became clearer, diminishing those gains.
In the case of gold, being on the opposite side of the risk trade turned out to be a costly proposition for holders of the yellow metal.
Futures of gold plunged more than $100 an ounce, or 4.5%, on Monday - the worst one-day plunge since August.
By Friday though, the safe-haven had recovered some of its losses, acting as a hedge against ramping Covid-19 cases.
A major U.S. lockdown similar to the March-May period may be inevitable if enough state governors decide to shut down territories under their jurisdiction to curb the spread of the virus, even if the Trump administration refuses to initiate such a move.
Fear of hospital ICUs being overrun reemerged this week as coronavirus infections set new daily record highs, breaching 150,000 cases on Thursday. According to Johns Hopkins University, more than 10.8 million Americans have contracted the virus since February, and more than 245,000 have died from complications caused by it.
The possibility of a second national lockdown is quite real with President-Elect Joe Biden’s coronavirus task force advisor, Dr. Michael Osterholm, saying a four-to-six-week closure of businesses could help break back of the pandemic.
It’s not just the U.S. that’s facing economic curbs. In Europe, freeway operator Vinci reported on Friday that traffic fell by 48% in the first full week of November in response to the government's latest public health measures. Those measures in Europe's second-largest economy are set to stay in place until Dec 1 at least. England is also in a state of semi-lockdown, while German Chancellor Angela Merkel warned on Friday that her government's recent restrictions on social gatherings may have to last through the new year.
All these could mean undue volatility in oil and gold.
“Oil has continued to move lower following an early week surge as the market assesses the ongoing demand destruction as coronavirus cases continue to surge in the US and Europe with added restrictions being implemented,” Alexander Turro, market strategist for RJO Futures in Chicago, said on Friday.
Since U.S. crude’s breakout to 10-week highs above $43 on Wednesday, Turro noted that it has corrected to a range of 42.89-$38.31 “as (anemic) global consumption and dampening fuel demand continue to remain at the forefront.”
In gold’s case, the swing between $1,850 and $1,900 an ounce could become a semi-permanent fixture unless new U.S. economic stimulus is passed in the New Year in response to the pandemic - and which would be a salve to gold.
"There is fear of a second wave with lockdowns and restrictions and the market has to work through (some) stimulus" for the U.S. economy, said Eli Tesfaye, senior market strategist at RJO Futures. "So, the market at some point has to anticipate that cash and price in the potential inflation."
Energy Review
New York-traded West Texas Intermediate, the leading indicator for U.S. crude, and London’s Brent, the global benchmark for oil, both showed an advance of more than 8% on the week.
For Friday, however, WTI did a last trade of $40.12, after settling the official session at 40.13, down 99 cents, or 2.4%. Brent, meanwhile, registered a final trade of $42.70, after finishing the official session at $42.78, down 75 cents, or 1.7%.
Barring Pfizer’s vaccine news, last week’s large declines in gasoline stockpiles and distillates inventories - reported Wednesday - also helped put a floor under $40 WTI.
But sentiment was weakened again by Thursday’s ominous forecast for demand by the Paris-based International Energy Agency. Also recent OPEC rumblings about staying the course with production cuts were offset by the cartel’s lowering of its demand outlook.
Finally, there’s the U.S. oil rig count - that indicator of future production - which rose for the eight week in a row on Friday, according to a reading by industry firm Baker Hughes.
While U.S. crude production has fallen from pre-pandemic record highs of 13.1 million barrels per day in mid-March to 10.5 million bpd now, the creeping rig count is raising concerns that output might swell at the wrong time as the world is heading for more Covid-19 curbs.
Energy Calendar Ahead
Monday, Nov 16
Private Cushing stockpile estimates
Tuesday, Nov 17
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Nov 18
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, Nov 19
EIA weekly report on natural gas storage
Friday, Nov 20
Baker Hughes weekly survey on U.S. oil rigs
Precious Metals Review
Gold prices settled up Friday as a hedge against ramping Covid-19 cases and a feared second national U.S. lockdown at some point.
But the rise wasn't enough to prevent the yellow metal from posting its worst weekly loss since September, triggered by early selling in the week after market hype on progress over a Pfizer vaccine for the virus.
New York-traded gold for December delivery did a final trade of $1,888.35, after settling the official session at $1,886.20, up 0.7%.
For the week, it lost 3.4%, its most for a week since late September.
“If gold can hold onto the $1,890 level in the short-term, prices should continue to consolidate higher,” said Ed Moya, analyst at OANDA in New York. “The path to record high territory will be a bumpy one for gold, but it is still there because the reflation trade is not going away anytime soon.”