Oil’s brief rally ended unceremoniously

Oil’s steady rally over the past week ended up hitting a wall overnight. Oil prices fell aggressively as traders took fright at the deteriorating consumption picture globally, led by European Covid-19 fears. With ample supplies on international markets, bullish positioning lost its nerve, Brent crude fell by 4.0% to USD40.80 a barrel, and WTI fell by 3.50% to USD39.15 a barrel.

What should be more concerning to oil markets is the divergences seen overnight. US API Crude Inventories posted a surprising fall but was wholly ignored by markets. Similarly, a much weaker US dollar in the past 24-hours has provided no support to ailing oil prices. These divergences suggest that more downside pain is to come.

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For its part, Brent crude fell through its 100-day moving average (DMA) at USD41.65 a barrel overnight. The 100-DMA having provided rock-solid support for Brent prices over the past six sessions. Its failure is yet another disturbing negative development with support nearby at USD40.50 a barrel—Brent’s multi-day lows around USD39.30 a barrel form a critical, must-hold support. Failure opens the door for deeper losses towards USD37.00 a barrel.

WTI also fell through its 100-DMA support at USD39.25 a barrel overnight, having traced out multi-day highs at USD40.80 a barrel. The 100-DMA now becomes intra-day resistance with initial support at the overnight lows around USD38.45 a barrel. Failure opens up much deeper losses, possibly as far as USD36.00 a barrel.

Gold climbs on a weaker US dollar

Gold continued its two-day rally overnight, powered by a weakening US dollar and risk-hedging ahead of the US presidential debate. Gold rose 0.85% to USD1897.00 an ounce, having flirted with resistance at USD1900.00 an ounce. With the debate having passed without incident from a purely financial markets perspective, some risk aversion positioning has been unwound, and gold has fallen to USD1888.00 an ounce in Asia.

Gold’s rally has been powered by a weaker US dollar mostly, with the debate flows being very short-term in nature as such gold continues to lack momentum of its own. It will continue to be at the mercy of US dollar gyrations.

Despite the lack of momentum, gold has traced out a triple bottom at USD1850.00 an ounce. That is also the location of its 100-DMA. Together, they form a formidable support zone, and it is hard to construct a bearish case at these levels as long as that holds. Gold has initial resistance at USD1900.00 an ounce, and some stop-loss buying should come to market if that level fails. In all likelihood, gold will move into a new trading range between USD1870.00 and USD1920.00 an ounce ahead of the US Non-Farm Payrolls on Friday.

 

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