Crude futures: more pressure

The latest US drilling rig count has dropped to 1,019, according Baker Hughes. This is almost 40% lower than early October highs. And yet, both crude benchmarks featured on the downside lately.  ICE Brent prices slipped back below USD 60/bbl. At a USD 8 discount to APR6, the market’s contango is trading little different from the prompt month’s discount observed earlier last week.

As highlighted before, the market in London tends to trade on sentiment. The late price correction in London was to be expected, given little new developments on the geopolitical front as far a Iraq or Libya are concerned. 

US stockpiles continue to build (at another record high las reported by the EIA last Thursday). At the same time US refineries were also taking less crude due to sever weather which should also filter through to the weekly inventory estimates going forward.

As much as the ever declining number of operating rigs matters in the long run, for the moment US supplies continue to grow while producers boost efficiency and delay completions. Generally, as soon as the late cold snap passes and the weather improves we will also be heading for the seasonal slowdown in refining activity in the Northern Hemisphere.

The ever choppy derivatives market had once again caught up with its physical counterpart or rather its short term fundamentals. In the short run, plentiful supplies continue to paint a bearish picture. In our view, this situation is unlikely to change until late spring with a sustained price rebound still sometime away. We would, certainly, keep an eye on the transatlantic spread for the first signs of change in the US fundamental picture. Brent’s physical premiums to regional benchmarks this side of the Atlantic will also help to gauge the domestic refining demand outlook.

In the meantime, we still see the market slipping lower, driven mostly by macro headlines or developments on the geopolitical front.  Bullish fundamental signals are unlikely to materialise in the very near future and volumes are set to remain relatively light. 

London's Brent future is supported near USD 55/bbl  and then USD 48/bbl with resistance back near USD 63/bbl.

Gold: the Fed setting the pace

At lows not seen since mid-January, bullion prices briefly slipped below USD 1,200 earlier on Monday. In fact, little changed in anaemic trading since earlier last week. And as US home sales data proved later in the session (at nine month lows), gold prices remain fairly sensitive to macro numbers form across the pond. The market then recovered back above USD 1,200 in thin volume trading.

Chinese players are still absent amid public holidays and there is little scope for any physical support here. Investor appetite also remains weak, despite small builds in global ETF positions at the end of last week.

Instead, the market will be eying Janet Yellen’s testimony to the US Congress when she starts delivering the Fed’s semi-annual take on the monetary policy later on Tuesday. 

It is likely the market will continue in dull trading against the greenback unless Yellen surprises and interest rate hike expectations change dramatically (currently the FX market is expecting a June increase). Yellen’s speech will be most interesting for her take on inflation. The headline CPI is likely to remain below the Fed’s 2% target in the near future. It questions the need to hike rates should price pressures remain tamed even as the labour market continues to improve.

Otherwise, there is little else to gold trading at the moment. It seem Greek headlines provided hardly any support to safe haven flows lately, just as suspected earlier. At the same time, the troika bailout extension deal could well take it off the radar for now. Naturally, this is still pending on Athens’s response with its proposed list of reforms earlier this week.

As for spot bullion prices, the key support remains at USD 1,180/oz with resistance back near USD 1,240/oz. 

Brent: running ahead

Market participants have been preoccupied with the US rig count lately. Latest numbers from Baker Hughes shows the number of active rigs slipping down to 1,056; contracting rapidly from the October peak of 1,609. It is an important measure of the drilling activity, but not the only one. US shale oil producers will be moving to more productive and mature plays, reducing test drilling on the fringes and cutting costs. Still, along with renewed geopolitical concerns in the Middle East, it helped to push the market higher.

Importantly, supplies remain plentiful in the short term and are unlikely to cause any panic in the physical market. The spot premiums are relatively tame in the Atlantic basin while anecdotal evidence suggests floating storage has been back in high demand this winter (for the first time since 2009). The contango is more pronounced for the NYMEX benchmark while Brent’s premium over WTI soared in the past weeks. It is little surprise, given the weekly EIA estimates put US commercial crude inventories at fresh record highs (since the EIA has started reporting these).

Many were arguing last month, that by leaving the joint output target unchanged in November, OPEC had nearly achieved the ultimate goal of throwing high cost North American producers off the board. But, it would be premature to assume so since the late price rebound could well slowdown the scaling back in the US shale output.  In short, crude prices need to stay lower for longer. We need a sustained period of sub USD 50/bbl WTI prices for any significant dent in this year’s projected supply growth in the US.

As for Brent futures, the recent price rebound of around 40% from early January lows, has been far too rapid. The market in London might have bottomed out last month, also as shorts were forced to cover back above USD 50/bbl. However, it is hard to envisage a sustained rally from here also as winter in the Northern Hemisphere draws to an end while refining demand slows. In January, the EIA projected a mid-year rebound in prices, expecting Brent at USD 54/bbl in May and then at USD 70/bbl by year end. At above USD 60/bbl this week, the market is well ahead of expectations.

London’s global oil benchmark quite often trades on pure sentiment and supply fears. The market soared to near USD 115/bbl in the wake of the ISIS crisis last June only to then tumble nearly 60% by the end of 2014 as soaring supplies overwhelmed slugging demand growth. Renewed jitters over supplies from Libya had certainly helped to support London prices in the past week and add to the recent spike in volatility. Materially, there will be little impact from the pipeline fire into Hariga after the National Oil Corp. reported an output drop to around 0.18mbpd from 0.35mbpd in January. Still, caution is warranted also amid security threats in Iraq.

Provided there are no new geopolitical surprises, Brent prices should take a breather here, In our view, a limited price pullback is more likely than a sustained rebound in the near future.

Gold: lack of interest

The Greek debt conundrum and active official sector purchases coupled with decent seasonal buying in China pushed the market past USD 1,300/oz in late January. However, having corrected form highs above USD 1,300/oz, gold continues to struggle with the upside. Matters are unlikely to improve with the physical market taking a breather as China heads for the Lunar New year holiday break from Wednesday.

On the investor side, some profit taking from this year’s highs highs had resulted in receding interest as players reduce heir ETF and futures gold longs. The SPDR Gold Trust alone is up 7.7% on the year and over 1% higher in February. A near 2% sell off earlier today will see a further reduction in spec longs when data becomes available.

The market is still up around 2% on the year, but it clearly failed to establish a sustained robust uptrend. The earlier 2015 safe haven buying was followed by a quickly waning investor appetite for bullion and some profit taking. All the above is overshadowed by the looming US monetary policy tightening. As ever, the timing is far from certain, but it is closer than it ever was.

The Fed reiterated in January it will be ‘patient’ with rate hikes. However, there is no doubt the US central bank will be well ready to hike rates this year, now that the quantitative easing is over and macro numbers continue to point at a moderate recovery and jobs growth. The FX market is pricing a rate increase in early summer, which would limit investor appetite for non-interest bearing assets like gold. Greece will remain in focus, but safe haven flows will be limited. Instead, bullion will become increasingly sensitive to US macro numbers as rate expectations start to swing wildly. In this respect, minutes form the latest Fed meeting will be in particular focus tomorrow night.

As for prices, the previously bullish technicals are now broken. The key support is back near USD 1,180/oz with little chance for a sustained price rally in the very near future.