Precious metals showed signs of life after the market concluded a long-awaited taper announcement from the US Federal Reserve was dovish, in the sense that the FOMC showed little appetite for rate hikes and once again repeating their transitory view on inflation. Adding to the dovish skew was the Bank of England's decision to keep rates unchanged despite seeing inflationary pressures at a near 25-year high. Gold returned to $1800 following another sharp and short-lived sell-off, but overall the market is sorely lacking the momentum to propel it out of the range that has prevailed for many months now.
US ten-year real yields dropping back below –1% helped off-set the stronger dollar and low stock market volatility. The latter being one of the reasons why ETF holdings have dropped to an 18-month low with real money investors shunning gold given the lack of a need to diversify portfolios. Focus on Friday turned to the monthly U.S. job report which continued to show strength, thereby potentially shifting views on monetary policy once more.
Crude oil is increasingly showing signs of having entered a period of consolidation and, following a two-month rally which up until recently had lifted the price of Brent and WTI crude oil by close to one-third, it could be argued it was overdue. However, we only expect this phase to be temporary with the strong fundamental reasons which supported the surge not gone away. With this in mind, we still see the risk of even higher prices towards yearend and into 2022.
Some of the reasons why oil prices have softened recently are highlighted below. It is worth keeping in mind that several of these could quickly turn around and become price supportive again.
- The prospect for OPEC+ continuing to increase monthly production at a rate of 400,000 barrels per day.
- Stalled Iran nuclear talks will resume on November 29, and in the yet unlikely event of a breakthrough, Iran would be able to ramp up production.
- Stabilizing gas prices, albeit at elevated levels, in anticipation of an imminent increase in flows from Russia reducing the recent gas-to-oil boost to fuel prices.
- Renewed worries about another Covid-related demand disruption, not least in China, the world’s biggest importer.
- A seasonal expected increase in US crude oil stocks due to reduced demand from refineries as they go through their annual maintenance season.
- The US government continuing and potentially accelerating crude oil releases from its strategic reserve. During the past two months, they’ve been averaging 1.1 million barrels per week.
- Selling from technical traders and speculators in response to this week’s break below recent support, in WTI most notably the uptrend from August low.
Against these mostly short-term developments, the oil market will still be facing years of potential under investments with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand but increasingly also due to lending restrictions being put on banks and investors due to ESG and the green transformation focus.
Whether the short-term trading range in Brent will be $80 to $85 or potentially some three to four dollars lower, will to a high degree be determined by US action to curb prices, Covid-19 developments and next week by the gas market when we will find out if Russia, as promised, will boost gas supplies to Europe, thereby potential softening prices further.