Oil slumps over Covid, gold steady

Oil prices dip as outlook worsens

Crude prices declined as unvaccinated countries continue the battle against the delta variant.  The crude demand outlook is getting bombarded with bearish headlines.  The short-term drivers are all negative: Brisbane’s lockdown was extended, the CDC raised South Korea’s travel advisory status one notch to Level 2, infections are spreading across China and the overall theme across much of Asia is for more restrictive measures.  The US has reached the 70% goal of having adults have at least one dose of the COVID-19 vaccine.  The current delta variant wave across unvaccinated states might be peaking in a couple of weeks.

Despite all the bearish sentiment with oil prices, the market is still in deficit, so the downside should be limited.  WTI crude will likely consolidate around the USD 70 level.

Gold

Gold is stuck consolidating above the USD 1,800 as investors await to see how the upcoming labor report will impact the Fed’s assessment of how the economy is progressing towards their substantial progress goal.  Despite slumping global bond yields, gold is slightly higher on the session.  It will be difficult to see much conviction is behind bullion if stocks continue to make fresh record highs.  The stock market has become a crowded one-way trade during the summer and that should trigger an excessive reaction once further progress is made in the labor market or if inflation risks grow.

The question for many gold traders is will the Fed taper in September or at the end of the year.  The Fed appears to have locked themselves to an outcome-based approach that should mean tapering will occur on the later side.  The economic data from the US will be good going forward, but as long as the labor market doesn’t improve too quickly, gold should be supported by the Fed.  If gold doesn’t break above the UD 1850 level post-nonfarm payrolls, it could get ugly very fast.

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