Coal lifts oil in Asia
Hong Kong coal futures have leapt higher once again this morning at the open, before, once again, quickly retreating to almost unchanged. Unlike yesterday, oil has refused to chase them higher with prices in Asia for Brent crude and WTI almost unchanged from the New York close. A higher US dollar and intra-day retreat by coal and natural gas prices have seen Asia traders move back to their preferred buy-the-dips strategy, rather than chasing prices higher.
Overnight oil prices continued to grind higher, with Brent crude reaching USD 86.00 a barrel. However, oil could not sustain its rally and both contracts fell to close lower on the day. Brent crude finished 0.90% lower at USD 84.10, and WTI finished 0.20% lower at USD 82.30 a barrel.
Oil’s rally ran out of steam for a few reasons. European natural gas prices eased, the US EIA forecast higher US shale production, notably from the Permian Basin. Finally, the Commodity Weather Group forecast warmer than expected weather for the rest of October for the US. The latter is significant, as it induced some temporary bearish price action and hints that a mild northern hemisphere winter would reduce a major pain point in the higher energy price mix. That is a big “if” to base policy on though. Reuters is reporting that OPEC+ compliance is running at 115%. That implies that even if OPEC+ was to blink and raise production targets, some members will struggle to pump more crude anyway.
Circling back to last week’s warnings about the overbought technical picture for oil, I note that the relative strength indexes (RSIs) on both contracts remain in very overbought territory. Given the weight of speculative longs out there, I still do not discount a sharp USD 5+ price correction, but I expect physical buyers to be lining up to buy a material dip in prices, and any dip will be short-lived.
Brent crude has resistance at USD 86.00 and the October 2019 high at USD 86.80, with support at USD 84.00 and USD 82.00 a barrel. WTI has resistance at the overnight highs around USD 84.00 and USD 86.00 a barrel. Only a fall through USD 79.50 a barrel changes the bullish outlook.
Gold rises in Asia on weaker US dollar
Gold traded sideways overnight, as the US dollar went nowhere, with higher yields at the shorter end of the US curve weighing on gold prices. Gold finished the overnight session just 0.15% lower at USD 1765.00 an ounce. General US dollar weakness in Asia has seen gold manage to stage a modest rally, rising 0.53% to USD 1774.20 an ounce. If nothing else, it shows that gold continues to trade inversely to the nuances of the US dollar and US yields. Higher dollar/yields equal lower gold and vice versa.
Firmer US yields will be a headwind for gold rallies, especially if it leads to US dollar strength. Gold is a wonderful head to very high inflation, but it is proving time and time again, to be a poor hedge to rising inflation. Gold has nearby support at USD 1760.00 followed by USD 1745.00 with failure signalling a retest of USD 1720.00 an ounce. Gold has resistance at USD 1780.00 an ounce failed followed by the 100 and 200-day moving averages (DMAs), today at USD 1795.00 and USD 1795.25, formidable resistance.
In the bigger picture, only a rise through USD 1835.00 an ounce, would trigger a multi-month inverse head-and-shoulders technical pattern and swing gold’s outlook back to positive. The risks remain firmly to the downside.