On Sunday, OPEC+ announced that it will reduce its output further, by some 1.66 million barrels per day, bringing the cartel’s total output reduction to 3.66 million barrels daily, or 3.7% of global oil demand. To sweeten the deal further for the oil bulls, Russia announced it would extend its 500,000 bpd cut until the end of 2023. The announcement triggered an immediate 8% spike in oil prices that had languished for months amid weak demand and a worsening macro outlook.
And now one analyst has predicted that the cuts will eliminate the huge surplus that had built up in the oil markets. Commodity experts at Standard Chartered have reported that a large oil surplus started building in late 2022 and spilled over into the first quarter of the current year. The analysts estimate that current oil inventories are 200 million barrels higher than at the start of 2022 and a good 268 million barrels higher than the June 2022 minimum.
However, they are now optimistic that the build over the past two quarters will be gone by November if cuts are maintained all year. In a slightly less bullish scenario, the same will be achieved by the end of the year if the current cuts are reversed around October.
Gold Momentum Continues
The latter part of 2022 saw gold markets enter bear territory shortly after hitting an all-time high. Luckily for gold bulls, the gold markets have enjoyed an upturn in fortunes, with negative sentiment triggered by the Fed’s hawkish outlook of higher-for-longer interest rates countered by the sudden collapse of the Silicon Valley Bank and then the plunge in Credit Suisse, sparking even greater fears of widespread contagion.
Gold prices have gained over 8.9% in the past 30 days and 10.4% in the year-to-date, rallying to USD 2,010/oz. The gold rally marks the strongest momentum since Russia invaded Ukraine in February 2022, with the war spurring a similar flight-to-safety trade.
Gold not only plays an important role in portfolio diversification but can also be an effective hedge against uncertainties. Gold markets were bullish early last year with the commodity in demand as a geopolitical hedge with demand for an inflation hedge helping also buoy prices in recent years before falling mid-year. As commodity analysts at Standard Chartered have noted, gold tends to outperform when the physical market cushions prices on the downside and macro uncertainty drives upside risk. The analysts say that the yellow metal had started to find support around 1,800/oz.
StanChart lays out two positive catalysts for gold going forward:
• Any change in sentiment is likely to push prices higher quickly thanks to gold positioning having been scaled back over recent weeks and light ETF inflows
• Central banks have become net buyers in recent months, with buying activity likely to further accelerate in H2 thus boosting prices
However, on a more sour note, StanChart says that gold’s role as a safe-haven asset is unpredictable, and does not always result in higher prices for an extended period even in situations of heightened geopolitical tensions.
The commodity experts note that gold has been showing a strong correlation with the USD, with the three-month rolling correlation currently at -75%, a positive development with USD weakening considerably from its September high. After briefly touching a 20-year high, the dollar has been weakening against major world currencies. Gains by the euro, which sent it further away from the sub-parity levels, as well as falling expectations for aggressive rate hikes by the Federal Reserve have knocked the dollar from its recent 20-year high.
The euro has been gaining serious ground on the greenback, and is expected to maintain its strength in the coming months. The euro has been flying with the EU economy doing much better than expected, thanks in large part to the region successfully securing its energy supplies, particularly natural gas. Indeed, the EU economy is now forecast to grow 2.8% in 2023 following a brisk 4% clip in 2022.
Meanwhile, gold’s correlation with real yields has jumped above 60%, another positive development with the Fed expected to become less aggressive with hikes after the SVB saga.
Most economists expect the Fed to stop raising interest rates at some point in the current year. However, “where” rates peak--also known in financial parlance as the “terminal” rate--is actually more important than “when” the hikes stop. While the Fed is becoming less hawkish and starting to raise rates in smaller amounts, what's clear at this juncture is that the central bank isn't done raising rates yet-- if the latest bunch of economic data is any indication. Although the job market cooled off in February from its sizzling pace in January, the U.S. job market remains red-hot, with an unemployment rate just above a half-century low. The unemployment rate in February clocked in at 3.6%, slightly up from 3.4% in January, with 311,000 jobs added to the workforce. These figures will do little to ease the Fed’s skittishness regarding an overheating economy.
Still, the outlook here is quite positive: StanChart notes interest rate expectations for November 2023 is currently priced in at 3.80%, down from a peak of 5.65% just a week earlier.
Overall, StanChart is bullish on gold and says it’s undervalued.
It’s going to be interesting to see whether the analysts’ bullishness will be vindicated if the latest developments can help gold markets regain their lost mojo over the long-run.
By Alex Kimani for Oilprice.com