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Sunday, February 28, 2021

Oil Prices Slide Overnight, Gold Shows Resilience

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Oil prices suffered a severe pipeline rupture overnight, as a falling stock market dealt a coup de grace to already weak sentiment driven by a supply glut, lower Saudi prices, OPEC+ compliance, and the end of the US driving season. Brent crude fell by 5.50% to USD39.70 a barrel. WTI fell 6.0% to USD36.70 a barrel.

The falls overnight leave both contracts just above critical long-term support at their 100-day moving averages. Brent’s 100-DMA is at USD39.50 a barrel, with a daily close below that, potentially extending losses to USD37.00 a barrel. WTI’s 100-DMA is at USD35.50 a barrel, with a daily close below that suggesting further losses to USD34.40 a barrel, and possibly as low as USD32.50 a barrel.

Given the severity of the move lower, I cannot rule out another large capitulation move more down as yet. However, both contract’s relative strength indexes (RSI) are now severely oversold and usually an excellent indicator of the end of extreme price moves. Further moves lower will almost certainly flush out physical buyers from hiding, and even allowing for all the negative factors above, prices look overdone down here. That said, they could look more overdone for a few days yet, but getting ultra-bearish on oil at these price levels may turn out to be a painful game.

Gold prices fell with US equities initially, trading as low at USD1906.00 an ounce in overnight trading. However, gold found plenty of patient buyers on the dip with prices rallying to finish almost unchanged at USD1931.50 an ounce. The decoupling of gold from the equity market sell-off will bring cheer to bullish investors and rightly so. Gold has once again held its daily support zone between USD1900.00 and USD1920.00 an ounce.

The question remains, however, if most of the resting buy orders were filled overnight, how much of that interest will be refreshed in the form of new buy orders today. If the answer is not many, a continued equity sell-off in New York could see gold move lower once again to retest USD1900.00 an ounce.

That may test the yellow mettle of investors, and a deeper correction to the August low around USD1860.00 cannot be ruled out completely. Channel resistance at USD1977.00 looks quite far away at this stage as well, with gold unable to sustain rallies to USD1950.00 in recent times.

Gold’s positive fundamentals remain intact over the medium to long-term. Investors may have to wear some pain before they see the gains in the shorter-term.

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