Commodities outlook: WTI surges, XAU/USD stagnates and Natural Gas continues to drop
11:38, 4 April 2023
Sunday brought a shock to oil markets which led to a gap higher at the open as OPEC+ announced a surprise cut in production at the end of this month. The implications of this decision are not isolated to the oil market as it leads traders to believe that it could revive inflation once again. That said, so far equity markets continue to enjoy their recent rally as they look past the recent banking turmoil and the risks of stagflation. The moves so far this week suggest that growth continues to be the key area of risk, having overtaken inflation at the end of last year.
Powell’s comments at last month’s FOMC meeting would have given investors some sort of reassurance that the economy seems to be under control, and therefore it almost feels like equity markets are challenging the recent moves in oil prices as they don’t think inflationary concerns are all that important right now.
In the past, higher oil prices meant there was more demand which was a good sign for the economy. This led to a positive correlation between oil prices and stocks. But given the extreme levels reached after the invasion of Ukraine last year, weakening oil prices were actually a sign of relief for investors, which broke the positive correlation narrative. Since then, it has been harder to determine the relationship between the two. So a lot will depend on the reasoning for OPEC’s decision to cut production, is it to combat weakening prices or is it a strategic alliance play? The first would imply a weakening economy, and therefore stocks shouldn’t be taking this so lightly.
So far, the feeling is that OPEC’s actions aren’t seen as hugely inflationary, which is allowing oil to rally without hindering overall market sentiment. The move in West Texas Intermediate (WTI) seems to have been sidelined as traders look for the next move higher. So far buyers are struggling to move within WTI’s key resistance range (80.65 - 82.54) which halted bulls from moving higher back in January and December. This is likely going to challenge buyers, as will the 200-day SMA lying up ahead at 83.55, but with a positive and strong RSI there may be some further bullish momentum in store this week.
Of course, the move in oil will not be isolated to the decision by OPEC, with a key risk event happening this Friday. Despite the Easter bank holiday, the US non-farm payrolls will be released this Friday and traders will likely continue to look for any clues about the strength of the US economy, especially after the concerns caused by the banking sector last month. The last two readings have shown a resilient workforce and despite a small uptick in February, the unemployment rate remains at historic lows. It’s kind of hard to say at this point how markets will react to a positive or negative reading given the implications on inflation and rate hikes from the Fed, but there is likely going to be increased volatility given the reduced liquidity and emphasis on economic data for clues as to where to go next, so traders are advised to hedge accordingly as to make sure they are not caught out by the possibility of exasperated moves.
WTI daily chart
Meanwhile, gold, which is regarded as a hedge against economic uncertainty and hardship, seems to have found resistance to move higher as the OPEC decision revives concerns about inflationary pressures. We know the precious metal behaves better as a hedge against recessionary concerns over inflationary concerns and therefore this possible change in rhetoric will likely weigh on gold over the coming days. Nonetheless, the economic turmoil caused by the rout in the banking sector gave the precious metal a nice boost at the beginning of last month, which saw it break above the highs seen earlier this year and trade at a 12-month high around.
XAU/USD managed to break above the $2,000 mark but on all three occasions, it failed to achieve a decisive close above this level, which spoke to the lack of conviction from buyers to trade above it. So far the path of least resistance remains firmly to the upside on the daily chart, with a strong pattern of higher highs and lows, but traders should watch out for a close below $1,950 as a sign of change in short-term momentum, which could see a retracement back towards $1,935. The NFP data on Friday could offer a good opportunity for buyers to achieve a sustained break above $2,000 if the data suggests a worsening economic landscape and increases concern about a recession.
XAU/USD daily chart
For natural gas, the rebound attempted in February failed to materialise into a sustained rally and the price has continued to fall steadily over the past month, coming to rest on a two-and-a-half-year low around 2.07, despite producers having cut back on their drilling efforts. The unusually high level of inventories due to the milder winter weather has created a situation where storage levels will be much higher than normal heading into next winter, which will continue to weigh on prices. The next area for traders to focus on will be the 2020 lows at 1.54.
Natural Gas daily chart