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Commodities Commentary

How much higher can oil go after breaking one month trading range?

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
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Airlines feeling the pain and energy stocks enjoying the gain, this is the 5% price increase impact of oil on equity markets in Asian trade.

Brent managed to break above a one-month $46-$50 consolidation range yesterday as OPEC sec-gen sees their strategy of defending market share working out. The breakout made some traders question whether the rally is temporary or we might see a trend of higher prices. 

When looking at the fundamentals, data from the Energy Information Administration show that output would reach a low of around 8.6 million barrel next year after reaching a record 9.6 million barrel in 2015. Experts agree that U.S. oil producers would struggle to refinance their debt at low oil prices and this would force some shale oil producers to exit the market providing another leg up for the recent rally. Rig counts also tumbled last week in a sharp decline of 26 rigs.

Weaker dollar is another factor as the inverse correlation between commodity prices and the U.S. currency is still tight. The longer the Fed takes action to tighten monetary policy the more support they might provide to prices.

Some might wonder why prices did not react to IMF’s downgrade to global economic growth on Tuesday, because the logic of lower economic growth is lower oil consumption. That’s true, but although weakness persist in some emerging economies, China continued to export more oil along with growth economies in Asia. 

Technically a break above $54.3 (31-Aug High) is needed to confirm the rally, and break above this level needs U.S. inventories to drop tremendously, which is not expected to be the case in today’s EIA crude oil stocks change due at 14:30 GMT.

 

Will the yellow precious metal shine again?

 

Gold traders all remember the 180% rally in price post the financial meltdown, and since peaking at $1920 it only went lower. Gold should arguably be the preferred asset at moments of turmoil, weak economic growth, extended period of easy monetary policies, geopolitical conflicts, weaker dollar… Although gold rallied by 4% after last week’s NFP report the metal is still more than 11% lower than January highs.

Investors clearly lost interest in Gold as a safe haven in their portfolios for last couple of years, and preferred bonds, even the ones with negative yields, which means you lend governments your money and instead of earning interest you have to pay interest. Insane, isn’t it? The rationale behind lending at negative yields is not to pay fees on money you lend but investors were betting that yields could fall even further, which pushes bonds prices higher, and investors quit with profits.

Gold benefits from inflationary pressures and we are currently in a deflationary environment, another factor that continues to weigh.

As of now, I still prefer the strategy of selling the rallies. I would also keep an eye on Gold funds. If investors’ appetite to gold changes this would put the strategy into risk. $1,168 a near term resistance to watch. 

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CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.