Commodities Week Ahead: Oil On Brexit Cliffhanger, Gold Keeps Hold Under $1500
Barani Krishnan | Oct 21, 2019 04:32
British premier Boris Johnson’s do-or-die move on Brexit adds new dread for oil longs this week, along with uncertainties over China’s economic growth and talk of Russia missing OPEC production cuts.
Gold, meanwhile, might not stray far from the $1,500 level on support lent by the U.K.’s initial determination to leave the European Union by Oct. 31. This is despite Johnson later asking the bloc for a three-month extension following Saturday’s parliamentary defeat of his exit plan.
Johnson will attempt another vote in parliament on Monday. A so-called hard Brexit—meaning leaving without a deal—could have severe repercussions for global risk markets, including oil, which has been struggling over the past month to break clear of the $55 per barrel cap on U.S. crude and $60 on global benchmark Brent.
Fiona Cincotta, analyst at forex.com, warned in a note that “risk assets across the board may gap” with another crushing defeat for Britain’s divorce plan.
The other Achilles heel for oil has been disappointing economic data points emerging from China.
GDP growth in the world's second-largest economy slipped to 6% in the three months ending in September, down from the previous quarter's 6.2%, data showed on Friday. It was the weakest level since China started reporting data by quarters in 1993.
h3 Anemic Chinese Data Continues To Hurt Oil /h3
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Dominick Chirichella, director of risk and trading at the Energy Management Institute in New York, said:
“The market is becoming exceedingly concerned over a China economic slowdown as global oil demand growth will likely follow downward, as China is the number one oil demand growth engine in the oil complex.”
Oil has been locked in a $5 range either way in the aftermath of the Sept. 14 attack on Saudi Arabia’s oil facilities.
On Sunday, Russia added to the already feeble risk appetite in oil by admitting it produced more crude in September than envisaged by its deal with OPEC, its price-support ally of the past three years.
Russia, OPEC and other oil producers, in an alliance known as OPEC+, agreed in December to reduce supply by 1.2 million barrels per day (bpd) from the start of this year. Moscow said at the weekend it breached its OPEC+ production quota last month after an increase in gas condensates output, as it prepared for winter.
While several members of OPEC have spoken out in the past of Russia’s selective practice in the enforcement of its OPEC commitment, the cartel’s kingpin Saudi Arabia has refrained from openly criticising Russia on this due to the sensitivity of Moscow’s role as a non-member ally.
Some analysts argued that element further emboldened Russia in acting as it pleased with OPEC, to the dismay of others in the 14-member group.
h3 Saudi-Kuwait New Oil Venture Could Bring More Unwanted Barrels/h3Adding to the weight on oil is an attempt by Kuwait and Saudi Arabia to restart oil production from jointly-operated fields in the 500,000 bpd Neutral Zone.
Kuwaiti media, citing unidentified sources, said the two key OPEC members had agreed to revive crude output from oilfields in the Saudi–Kuwaiti divided zone. Kuwait’s deputy foreign minister has so far described negotiations on the project as “very positive".
Analysts, however, weren’t as excited about the prospects of the two Gulf giants adding more oil to a market struggling once again from the perception of oversupply.
Stephen Innes, market strategist at AxiTrader, was quoted saying by Reuters:
"Those extra barrels will come to market at a most unwelcome time.”h3 Gold Could Stay Near $1,500 Level /h3
Gold posted a weekly gain in Friday’s market but safe-haven investors and those traditionally long the yellow metal largely sat out, letting prices dip, with few leads to chase ahead of the Brexit vote.
The commodity also dipped on signs fewer central banks around the world might ramp up on another round of monetary easing.
For the week, both U.S. gold futures and bullion posted a slight gain, although they remained just under the key $1,500 bullish line.
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