Oil tumbles on recession nerves, gold slides

Oil plummets overnight on recession fears

Recession fears saw oil markets plummet overnight, with both Brent crude and WTI taking out their 2022 rising support lines in no uncertain terms. Brent crude slumped by 7.90% to USD 104.75, having tested USD 101.00 a barrel intraday. WTI slumped by 8.75% to USD 100.90, trading as low as USD 97.50 a barrel intraday. In Asia, both contracts remain under pressure as China lockdown nerves sweep the region. Brent crude has fallen 0.90% to USD 103.85 a barrel, and WTI is 0.60% lower at USD 100.00 a barrel.

The price action overnight, with both contracts trading in near fifteen dollar ranges, hints more at panic and forced liquidation than a structural change in the tight supply/demand situation globally. Although I acknowledge recession risks in the US, and covid zero ones in China, the world’s two largest consumers, the futures markets in both Brent crude and WTI remain in heavy backwardation. That says that in the physical market, supplies remained as constrained as ever, and despite the noise seen overnight, oil prices may be in danger of overshooting to the downside.

Having said that, the failure of the 2022 support lines on both contracts so comprehensively must be respected, as are looming recession risks around the world. But with Russian oil supplies set to drop as the year progresses and it runs out of Western parts to maintain fields, and with the rest of OPEC hopelessly uninvested in maintaining production capacity, I fear the days of USD 100 oil will be with us for some time yet. That said, Brent crude and WTI are likely moving into a new USD 95.00 to USD 110.00 barrel range.

Brent crude has resistance at its 2022 trendline at USD 108.85 a barrel, followed by the 100-day moving average (DMA) at USD 110.30. Support is at USD 101.00, USD 100.00, and then USD 96.25 a barrel, its 200-DMA. WTI has resistance at its 100-DMA at USD 106.95, followed by the 2022 trendline at USD 108.50 a barrel. Support is at USD 99.60, USD 97.50, and then its 200-DMA at USD 93.40 a barrel.

Gold capitulates

The massive strength of the US dollar across asset classes overnight was more than gold could withstand, despite lower US yields. It wilted in the face of US dollar strength and finished the overnight session 2.40% lower at USD 1765.00 an ounce. In Asia, it has eked out a tiny gain to USD 1767.40 an ounce.

With gold moving inversely to the US dollar and no other inputs driving the price, gold’s only salvation from here is entirely reliant on a sudden reversal of course by the greenback. Having finally broken out lower from its multi-month USD 1780.00 to USD 1880.00 range, the failure of USD 1780.00 is an important technical development. Assuming the dollar rally continues, the technical picture suggests a move lower to USD 1720.00 an ounce in the days ahead.

Gold has resistance at USD 1780.00, USD 1785.00, and USD 1820.00, its downward trendline. Support is at USD 1764.00 and then USD 1720.00, followed by USD 1675.00. Failure of the latter sets in motion a much deeper correction, potentially reaching USD 1500.00 an ounce.

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