Both yellow and ‘black’ golds are currently finding support from heightened fear among investors that the U.S. and its allies may soon launch a military strike against Syria. This is in response to the suspected chemical weapons attack in the country. The fear is that there might be counterstrike by Russia, which could further damage Moscow’s relation with the West. Indeed, in a tweet, US President Donald Trump has said: “Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and “smart!” You shouldn’t be partners with a Gas Killing Animal who kills his people and enjoys it!”
Fears that the supply of crude could be interrupted as a result of the US strike is the main reason behind the oil price rally. A barrel of Brent now costs more than $71. Oil prices have been further supported by the OPEC’s reduced output. However with the US oil production set to rise further in the coming months, the global oil market will likely remain amply supplied in the long-term. We therefore think that oil prices will struggle to rise significantly further, although in the short-term price spikes are possible given the heightened possibility of military action in Syria. The fact that both Brent and WTI are testing or approaching their previous 2018 highs means there is also the possibility of at least a short-term breakout as resting buy stop orders are tripped.
Dollar-denominated and perceived safe-haven gold, meanwhile, is finding additional support from a struggling US currency and heightened volatility in the stock markets. The Dollar Index has found it extremely difficult to find support, especially after that disappointing jobs report was published on Friday, which helped to lower expectations for aggressive rate hikes from the Fed. The greenback and the stock markets have also been held back amid political turmoil within the US and ongoing trade war concerns. Market participants do not appear to be too optimistic about the prospects of an imminent dollar recovery: every attempted rally has so far turned out to be a dead-cat bounce. The dollar could get in real trouble if today’s publication of consumer inflation data points to weaker price levels in the US. Headline Consumer Price Index (CPI) is expected to have remained flat in March, while core CPI is expected to have risen by 0.2% on the month. However, if CPI turns out to be surprisingly stronger than expected then this may underpin the dollar and undermine gold.
As Brent crude tests the previous 2018 high of $71.25, the momentum indicator RSI is in a state of negative divergence. The momentum indicator thus points to declining momentum. However it does not take into account the current fundamental backdrop. So, treat the RSI with a pinch of salt and bearish speculators should wait for a clear confirmation – such as a fakeout – before potentially deciding on a bearish trade. The next bullish objective is at around $73.00, which corresponds with the top of the bullish channel. The next level of interest above this is the 127.2% Fibonacci extension level at $73.85.
Gold, meanwhile, looks like it is about to finally break out after spending months in consolidation. A close above the bearish trend line at $1350/55 area could be the trigger.