Although the cloud of “trade war 2.0” still looms over the market, market sentiment has received a significant boost. Oil prices continued to rise more than 8 percent in Asian trading on Tuesday (May 5). Gold and the dollar have been flying in tandem as concerns about trade between China and the United States continue to drive safe-haven demand.
Oil prices soar 8%
After surging 8% the previous day, the June contract for WTI crude oil futures in Asia rose more than 4% in the morning before expanding to 8%.
Recently, the oil market has seen a number of positive factors: more and more countries are starting to restart their economies, OPEC+ this month began a new round of production cuts, the world’s largest oil companies cut supplies, and so on.
On Monday, a number of governments, including Italy, Finland and several U.S. states, moved to ease the blockade in an effort to jump-start their economies.
New York gov. Andrew Cuomo on Monday outlined a plan to restart business in the state worst affected by the novel coronavirus pandemic. California governor Gavin Newsom says the state’s retailers could begin work as early as this week.
The organization of petroleum exporting countries (OPEC) and its Allies will start a new round of production cuts on May 1. Under the agreement reached in April, OPEC + will cut production by 9.7 million barrels a day in May and June in response to a severe drop in global oil demand caused by travel restrictions imposed to prevent the spread of the coronavirus outbreak.
“Oil overcame The current oversupply,” said Phil Flynn, senior market analyst at The Price Futures Group. The market is closely watching the start of the biggest production cut ever.” He said the cuts were bound to lead to “the largest reduction in crude oil and its manufactured production”, but the current high level of oversupply was also limiting the price rise.
In addition, oil and gas production by some of the world’s largest oil companies will fall in the second quarter of 2020 to levels not seen in at least 17 years.
Oil storage is also improving. Enbridge, the Canadian pipeline company, said in a filing with Canada’s energy regulator that it had reached agreements with transportation companies to temporarily store crude oil in North America’s largest pipeline network.
“The market continues to price in the idea that things are improving,” said Gene McGillian, vice President of market research at Tradition Energy.
Goldman sachs says it is increasingly optimistic that oil prices will rise next year because of lower crude production and a partial recovery in oil demand.
Goldman sachs raised its forecast for the 2021 price of brent crude, a global benchmark, to $55.63 a barrel from $52.50 earlier. Raised its forecast for U.S. crude to $51.38 a barrel from $48.50.
Energy, a strategist at Goldman Sachs Damien Courvalin wrote in a report on Friday, because of the crude oil supply is rapidly decreasing, and the demand for oil will gradually improve, as countries gradually unlock fundamentals of crude oil is expected to greatly improve, result in crude inventory growth rate has slowed recently, coupled with the emergence of innovative storage way, the oil market seems to be able to withstand the test of storage capacity, is expected to market headed for balance.
Driven by the market’s rebalancing, Courvalin expects a “three-part” rally in oil prices. The second phase starts from the second half of 2020, when the crude oil market violently rebalances, and the supply begins to exceed supply, but the inventory pressure is relieved and brent crude oil is bullish to $30. The second phase may last until the third or fourth quarter of 2020. In the third stage, the market will become more concentrated, helping to push up oil prices, with Goldman sachs targeting $65 a barrel for brent in the fourth quarter of 2021.
Just two weeks ago, Goldman sachs issued a bearish forecast that oil futures would fall back into negative territory in June. ‘we are not at a turning point where supply and demand begin to balance,’ Goldman wrote in late April. ‘it could be four to eight weeks before we can safely declare a bottom in the oil market.’
Trade war 2.0 restarts risk-off mode gold flies with dollar
Now rising tensions between the U.S. and China pose another challenge for markets. U.S. President Donald trump and secretary of state Mike Pompeo again blamed China for the new outbreak, adding to market concerns.
Chris Weston, head of research at Melbourne brokerage Pepperstone, said: “the risk of a pullback has increased this week. The us is not the only country that has publicly targeted China, whether it’s trump, kudlow or pompeo, it’s been mentioned a little more frequently and traders are selling the renminbi.”
“Trump is running for re-election,” said Jim McCafferty, co-head of Asia Pacific equity research at nomura, who sees the move as reminiscent of then-president Ronald Reagan’s “trashing Japan” policy in the 1980s.
“We’ve seen this before, and I think as governments around the world become more focused on domestic issues. It makes sense to let other countries take the blame, “he said.
Analysts are discussing how the United States might retaliate by raising trade tariffs or reneging on China’s holdings of U.S. government debt. They agreed that there would be more volatility in the currency markets in general.
The dollar index.dxy came under slight pressure on Tuesday and is still trading above the 99 level after a sustained rally in the Japanese and U.S. indexes, mainly driven by safe-haven buying.
Erik Bregar, head of foreign Exchange strategy at Exchange Bank of Canada, said he was watching closely for signs of a “trade war 2.0 with China and a renewed dollar shortage.”
“Many investors are skeptical that risk appetite will rebound after stocks hit lows on March 23,” said Ed Moya, senior market analyst at OANDA in New York. “You are going to see investors become very conservative and we are going to see steady haven flows which should benefit the dollar.”
While the dollar continued to rally, spot gold was also climbing, briefly touching above 1710, as fears of a new trade war flared and investors sought safety. In Asian trading Tuesday, gold was hovering around the 1700 mark.
Holdings in the SPDR Gold Trust, the world’s largest Gold ETF, rose 3.81 tonnes, or 0.36 per cent, from a day earlier, marking the 18th straight day of heavy risk aversion.
Bob Haberkorn, senior market strategist at RJO Futures, said: “investors are fleeing to safety and the stock market looks weak because it’s not clear how this is going to play out. In the coming months, there could be a lot of problems in China and other parts of the world around the outbreak.”
Phillip Streible, chief market strategist at Blue Line Futures in Greenwich, Connecticut, said gold at $1,700 an ounce would be appropriate, and the downside would require support at $1,660.
Bart Melek, head of global strategy at TD Securities in Toronto, said last week’s drop was driven by positioning in the gold market at the end of the month. The second quarter will be a difficult time for gold. But in the long term, inflation will be higher, which will be a big boost for gold.
Technically, breaking above $1,700, which had been a psychological resistance level for gold, means bulls will continue to control the market and will pave the way for testing higher resistance levels, with gold’s next resistance levels at $1,715, $1,732 and $1,760, according to DailyFX. At the moment, the most important buying levels are $1,685, $1,663, and $1,640.