Oil dips as coal delines, gold rallies

Oil weakens on China coal slump

Mainland coal futures slumped limit-down yesterday after the government threatened to intervene in the coal market to control prices. Hong Kong futures have fallen by 8.55% this morning and combined with another easing in natural gas prices, oil has modestly retreated in Asia. That has seen Brent crude give back half of its 1.0% overnight gains, falling by 0.55% to USD 84.65 a barrel this morning. WTI, closed nearly unchanged overnight after US API crude inventories recorded a sharp increase. WTI in Asia is 0.55% lower as well, at USD 82.00 a barrel.

With coal and gas prices easing and with the relative strength index (RSI) technical indicators still in overbought territory, the odds of a sharp, but material fall in oil prices are rising. Brent crude could fall to USD 82.00 and WTI to USD 78.50 a barrel, and still comfortably remain in a strong bull market. A culling of speculative longs would be no bad thing for the overall uptrend, and more headlines on price controls from China, or a higher than expected official US Crude Inventories number this evening could be the nudge markets require.

Even if oil was to stage a USD 5.00 pullback, I continue to believe that it will be short in duration. With OPEC+ at 115% compliance and unable to rapidly increase production, US shale increasing only slowly, and energy shortages all over the northern hemisphere, any material fall in prices will see buyers flood in to buy the dip.

Brent crude has resistance at USD 86.00 and support at USD 83.80 a barrel, followed by USD 82.00 a barrel. WTI has failed twice ahead of USD 84.00 a barrel, forming initial resistance. Support nearby at USD 81.80 is in danger of being tested. A loss of USD 81.80 leaves an empty hole until USD 79.50 a barrel.

Gold rally capped by US yields

Widespread US dollar weakness earlier in yesterday’s session saw gold rallying impressively, climbing 20.00 dollars to USD 1785.00 at one stage. However, a renewed rise in US long-dated yields torpedoed the rally, with the resulting US dollar strength pushing gold back to a close at USD 1767.50 an ounce, a modest 0.27% gain for the day. In Asia, a slight fall in the greenback has lifted gold 0.25% to USD 1774.00 an ounce in a quiet session. Gold’s fate remains inextricably linked to the direction of the US dollar with US yields roving once again, to be a headwind to sustained price gains.

That said, gold is slowly but surely forming what appears to be the second shoulder of an inverse head and shoulders pattern through a series of higher daily lows. In the bigger picture, a rise through USD 1835.00 an ounce, would trigger the multi-month inverse head-and-shoulders technical pattern and swing gold’s outlook back to positive, targeting a move back above USD 2000.00 an ounce. Still, the risks remain firmly to the downside unless US yields have a sustained move lower which sinks the US dollar.

Gold has nearby support at USD 1765.00 and USD 1760.00 an ounce, which is followed by USD 1745.00; failure signalling a retest of USD 1720.00 an ounce. Gold has resistance at USD 1785.00, followed by the 100 and 200-day moving averages (DMAs), today at USD 1793.85 and USD 1794.50, which remain formidable resistance.

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