Saudi Arabia and its GCC friends have and will undoubtedly continue to apply a lot of pressure on the U.S. in order to avoid an escalation which would hurt economic growth and sentiment across the region. Not least the UAE, which is currently preparing to host Expo Dubai 2020 from October to April next year. It is expected to attract more than 25 million visitors from over 192 countries.
Crude oil is currently being held down by rising non-OPEC production led by the U.S and a potential disruption to supply could be mitigated by the release of strategic reserves held by the U.S., China, Saudi Arabia and IEA member countries.
Most of the Middle Eastern oil travels east not west with China being the biggest buyer. Iran, hit by sanctions, receives most of its oil revenue from China and any obstruction or risk to the safe passage from the Arabian Gulf would hurt them as well.
Finally, speculative buying of Brent and WTI crude oil since the OPEC+ meeting on December 6 reached 213 million barrels in the week to December 31. The sharp sell-off, once tensions eased, probably got exaggerated by the need from those holding loss making positions to reduce.
Having surrendered half the October-to-January gains, crude oil is likely to settle into a range with Brent crude oil, given the risk of another flareup, likely to find support between $64/b and $62/b. During Q4 we focused on a $60/b to $65/b range but following the agreement and adaption of further OPEC+ reductions, we raised that range by three dollars.
Providing the geopolitical stage stays quiet, the short-term market direction is likely to be determined by the weekly U.S. stock reports, economic leading indicators, U.S. – China trade news and monthly oil market reports from EIA, OPEC and IEA, with the next all due between January 14 and 16.
After racing higher this past week, and almost reaching our 2020 target at $1625/oz in three days, gold may now spend most of the first quarter consolidating. From a technical perspective preferably above $1510/oz and no lower than $1450/oz, before eventually moving higher later in the year. The short-term consolidation risks also takes into consideration the near record level of long hedge fund positions, which in the short-term could act as a drag on the price through long liquidation.
Geopolitical events such as the early January US-Iran standoff has supported gold but only for relatively short period of time. Apart from the underlying support from money managers using gold as a portfolio insurance the yellow metal need support from some of our 2020 expectations in order to climb further. They are: Federal Reserve cutting rates by more than expected, rising inflation concerns through higher input costs from energy and food, continued central bank buying (de-dollarization), a weaker dollar and not least multiple event risks culminating in the November US Presidential election.