Brent crude closed at $38.73 a barrel, while U.S crude oil futures settled at $36.26 a barrel, by the end of the week’s trading session on Friday night.
Both benchmarks for crude printed weekly declines of about 8% – their first after six weeks of bullish run that rallied crude prices off April’s lows. The recent dip is as a result of fears that a second wave of the coronavirus pandemic will disrupt the market once more.
“This market is at a crossroads. If demand continues to improve, the oil market has a lot more to go on the upside,” said Phil Flynn, senior analyst at Price Futures Group. “If we get into a situation where we start to take steps back with the coronavirus, the market is going to go down.”
In addition, U.S. crude oil inventories surged to a record of 538.1 million barrels, as cheap imports from the Saudis flooded the American oil market.
Why OPEC+ decided to cut oil production: Demand for crude oil dropped, in spite of a deal brokered by the Saudis, Russians, and other oil producers to reduce oil production. The world was also experiencing an oil glut market, with about 100 million barrels of crude produced daily.
The build occurred despite producers from member countries of the Organisation of Oil Exporting Countries (OPEC), Russia, and other allies reducing crude oil output.
Major oil producers slashed oil output by 9.7 million barrels per day, about 10% of normal oil demand, and agreed to extend oil output cut last week.
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“While a bullish argument can still be made as production continues to decline with demand still showing improvement, we look for the downtrend in output to begin slowing appreciably while demand recovery could be downsized if the coronavirus continues to ramp up,” said Jim Ritterbusch of Ritterbusch and Associates.
Gold price rises further due to influx of new COVID-19 cases
Gold was up in Asia on Tuesday morning, as investors increasingly turned to the safe-haven asset given the continuous increase of the number of COVID-19 cases globally without signs of abating soon. As of July 7, data from Johns Hopkins University revealed that there were over 11.5 million cases globally, with the United States accounting for about 3 million of them.
Gold futures were up by 0.06% at $1,794.65 by 10:12 PM ET (3:12 AM GMT), moving closer to the 1,800 mark. Stocks, which typically move inversely to gold, were also up on Tuesday.
In the midst of this, the U.S. reported an Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers’ Index (PMI) of 57.1 for June on Monday. While the figure exceeded analyst forecasts noting that the U.S. services sector is back on a growth trajectory, investors are still cautious about the recovery of the global economy as COVID-19 numbers keep increasing with no cure in sight.
These events will give gold a boost in the short term. The impact of government stimulus measures globally will also impact the commodity.
Stephen Innes, Chief Global Market Strategist at AxiCorp in a note to Nairammetrics, explained in detail why Gold is edging up.
“Gold edges higher as COVID-19 cases increase concerns, offsetting positive data. While the upside is intact, $1,800/oz is stiff resistance. Gold managed to trade up despite a rise in “risk-on” investor appetite and COVID-19 concerns, which do not appear to be going away, are providing underlying support.”
Commenting on the impact of the U.S. on the price of the commodity, he added that “U.S. fatalities are now above 130,000; as US cases approach 3 million, about a quarter of the entire known global caseload, it raises the level of political discord in the US. Given that the genesis of the “risk-on” shift was only a China Times article encouraging China retail investors to buy stocks, gold investors quickly looked through the market pump.”
“However, one reason the markets remain positive over the longer-term is that gold is tied to government spending and accommodative monetary policies outside the US,” he added.
Rising COVID-19 cases in world’s biggest economy falter crude oil prices
OPEC+ is lowering output by 9.7 million barrels per day (bpd) for a third month in July.
Crude oil prices decelerated on Tuesday, pulling back earlier gains recorded at the previous trading session on growing concerns that surging COVID-19 cases in the world’s biggest oil user, the United States, would limit the upside in energy demand.
U.S. West Texas Intermediate (WTI) lost about 0.66%, to trade at $40.46 a barrel at 6.11am local time after surging as high as $40.36 in its intra-day trading session. Brent crude also lost about 0.63%, to trade at $42.83, after hitting an intraday high of $43.19.
“The potential for demand destruction as lockdown re-instatement looks more likely are combining with concerns about OPEC+ discipline to weigh on oil prices,” CMC Market’s Chief Market Strategist Michael McCarthy said in a note to Reuters.
The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia, collectively known as OPEC+, are lowering output by 9.7 million barrels per day (bpd) for a third month in July.
Stephen Innes, Chief Global Market Strategist at AxiCorp, in an email to Nairametrics, explained the macros limiting the prospect of oil demand. He said:
“The faltering re-opening of the US States is also partially offset by the muscular approach by Saudi Arabia. They are seeking to enforce compliance with OPEC+ quotas – both are currently important in maintaining market balance and ultimately drawing down global inventories.
“It seems traders are getting more accustomed to minor retracements and rallies than expecting a significant price shift this week as a range trade mentality continues to resonate where Brent $40 per barrel does give the appearance of something of a floor.
“With the market torn between robust cyclical data and rising virus case counts in the Sun Belt, putting in significant headroom above $WTI 40 was also challenged by a possible resumption of US shale production as price move higher. While no less concerning is OPEC+ could roll back cuts in August.”
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In addition, data from the American Petroleum Institute industry group scheduled to come out later today and the U.S. Energy Information Administration data planned to be out tomorrow, are expected to show a 100,000 barrel rise in crude oil stockpiles, six experts polled by Reuters estimated.
Gold rises near long-time high of $1,800 as U.S. dollar weakens
The price of gold had experienced a level of pressure, temporarily losing its gains.
Gold futures rose even higher on Monday, led partly by a weakening U.S. dollar amidst rallies of global stocks. As measured by the ICE U.S. dollar index DXY, -0.37%, the U.S. dollar was off 0.4%. The implication of a weaker U.S. dollar is that assets that are priced in the currency will become more attractive to buyers that employ other monetary units.
Global stocks had rallied as a result of a surge in Chinese markets as Beijing’s state-run media put out a front-page editorial that encouraged investors to buy stocks towards supporting domestic markets. Yet, the increase in COVID-19 cases in the U.S has left investors unsure.
Adrian Ash, director of research at BullionVault explained that, “Bullion prices don’t typically jump because of social unrest or geopolitical strife. But if those stresses add to a financial crisis or economic slump, gold prices can spiral higher.”
For these reasons, gold futures in August rose $2.90, or 0.2%, at $1,792.90 an ounce, following the end of the most-active contract on Thursday according to FactSet data.
The price of gold had experienced a level of pressure, temporarily losing its gains which had risen as high as $1,799 a little after the economic data released Monday showed that the Institute for Supply Management’s index of nonmanufacturing companies increased to 57.1% in the month of June from the 45.4% attained in May. This was the single largest increase since the commencement of the survey as far back as 1997.
Ash noted that “It’s hard to see what stops gold reaching new highs from here.”