Crude oil is back in green, trading 1.19 percent higher after the price plunged nearly 5.7 percent yesterday. Clearly, bargain hunters are back in town. However, it is on track to record the worst week of the year (as shown in the chart below), and this is due to the increase in trade war tensions between the US and China. Investors are concerned that the dispute is going to leave a major dent on the oil demand, after all, we are talking about the two biggest economies of the world. If the business cycle starts to slow down, it is going to have a huge impact on oil demand and the fact is that the spillover effect of the business cycle in these countries also has an impact around the world.
The recent strength in oil price was mainly due to the concerns over supply because Donald Trump decided to pick a fight with the Republic of Iran. As, if the Middle East isn’t already sensitive enough. Sanctions on Iran triggered a huge surge in the oil price. There is no doubt in saying that investors have become more sensitive to Donald Trump’ tweets. They have large implications across multiple assets.
The oil price also got a tailwind because of the sanctions on Venezuela and the disruption in oil production from Russia to Nigeria. For now, these disruptions on oil supply have failed to triumph the pessimism in the market.
The surge in the oil price which we are experiencing today may not last forever if the trade issues continue to escalate. Yes, there is no harm in saying that the oil industry has been resilient to the trade war issues for a long time because it is not that the trade war started only this week but the reason that investors didn’t pay too much attention to the dispute was mainly due to the concerns over the supply disruptions and a belief that the trade war would not last this long. Donald Trump has softened some of his stance today towards China, but we are nowhere near to where we need to be.
In terms of technical analysis, over the past 2 days, the price has fallen more than 8%. This sell-off made the price to break out of its upward channel towards the downside. The WTI price had been trading positively for most of the year. The downward channel’s strength is in focus for now and it is likely that the price may continue to trade within this channel unless the momentum really picks up and pushes the price out of this spiral. The support is near 55.80 and a break of this would open the door towards the next level of 53.20. The resistance stands at 63.96.
GOLD
The precious metal has continued its move to the downside after a brief rally yesterday, which was triggered due to the soft economic numbers out of the US. The US Initial Jobs data fell short of expectations; the actual number was 211K against the forecast of 215K. But the bad news didn’t stop there, the Manufacturing PMI and New Homes Sales numbers were soft as well. This all helped the gold price to move higher, but the momentum wasn’t strong enough to push the price above the critical level of $1,300. One important factor to note is that the exchange-traded funds have added 7,759 troy ounces of gold during the last trading session. SPDR Gold Shares, the biggest gold ETF by State Street also confirmed that the institutions are still maintaining their holdings and we have not seen any change during the last session.
The safe haven, gold has reacted to trade war development, but it has not shown any extreme reactions, meaning we have not seen any explicit moves to the upside in the gold price on the back of the trade war between the US and China. It looks like gold traders do not see it as a major threat at all, which could be a very expensive mistake.
