Oil in choppy waters, gold holds gains

Demand to pick up later this year

It’s been a choppy session in the oil market, where Brent is hovering around $80 and WTI $75. We’ve now seen three sessions on the bounce in which oil prices have rallied before ending the day well off the highs. Not a particularly bullish signal.

There’s a lot to consider in oil markets at the moment and the near-term risks probably are more tilted to the downside. The start of the year could see countries fall into recession as the cost-of-living crisis bites, interest rates are hitting a level that could significantly hurt economic activity and China is likely to experience the worst of the Covid surge after relaxing its approach.

Beyond that, things could start to look up for a number of reasons. China could bounce back strongly, especially if backed by monetary and fiscal stimulus, central banks may discover they have room to cut rates if inflation falls substantially and economies are in recession and Russian output could be squeezed as sanctions take their toll. A lot of ifs and buts of course, but that is the uncertain world we now live in.

Holding on

Gold is holding onto gains well considering the Fed’s efforts to address market interest rate expectations. Yields remain near their recent lows and gold near the highs around $1,880, indicating that policymakers have a lot more convincing to do. That may be made harder on Thursday if core inflation is lower than expected, undermining the central bank’s hawkish stance. Of course, there will come a time when that will have to change and it may be fairly abrupt.

For now, the yellow metal faces strong resistance around $1,880-$1,920, a region that we’ve seen a lot of activity around in recent years. Momentum remains favourable for the bulls but that may change now that the price is testing that $40 range.

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