Commodities

Crude oil, gold move in opposite directions

G Chandrashekhar | Updated on February 11, 2021 Published on February 10, 2021

The markets for the two commodities that are eternal favourites of punters — crude oil and gold — are currently moving in opposite directions — and in both, sentiments are playing a role.

While crude oil has been rising relentlessly with the Brent breaching $60 a barrel for the first time in over a year, gold has been under pressure in recent days with the rates falling to a three-month low (around $1,800/ounce) from the dizzying heights achieved in August 2020.

Interestingly, there are supply- and demand-side factors operating in both the markets that place the commodities where they are. Doubtless, ultra-accommodative monetary policies operate as a common factor for both the commodities, but there are other diverse factors, too.

Oil boost

In the case of crude oil, rising optimism about economic recovery that will inevitably result in higher oil demand, slow but steady resumption of the transport and travel sector, and, importantly, the availability of vaccination against the pandemic have combined to boost the demand side.

As for supplies, under the lead of Saudi Arabia, the OPEC+ has maintained admirable discipline, as far as production cuts are concerned. In the US, rig counts are rising gradually as WTI (West Texas Intermediate) trades well above $50 a barrel, making shale production attractive. But producers are unlikely to ramp up production soon, given the financial challenges they face.

The crude-oil market in 2021 is most likely to remain tight and possibly post a deficit. This has encouraged institutional investors to take long positions on the bourses. No wonder, the Brent is now as expensive as it was over a year ago.

The question then is how long Saudi Arabia would continue to restrain its normal production, while other producers benefit from higher prices. The prospect of Saudi Arabia reviewing its production level and raising it from April onwards is real. Iran is another candidate to watch out for additional supplies, but the Biden administration’s response would be critical.

Reduced glitter

Gold is in a different trajectory with price plunging below the psychological $1800/oz last Friday. For sure, the yellow metal had benefited from the massive liquidity infusion in major economies and a risk-off environment that has supported its haven status.

But more recently, a firmer US dollar and higher US bond yields have contributed to the downward pressure. But two significant factors cannot be overlooked. There is now a growing impression among market participants that the expansionary monetary policy of the US Federal Reserve may not continue for long. To be sure, this is a perception that’s gaining ground.

Weak physical demand is another negative factor for gold. In 2020, the market faced a slump in jewellery demand in most economies. Imports to China and India fell sharply. It was financial investors who dictated the market. Now, with a risk-on environment — rising stock market, for instance — less-committed gold bulls are gradually exiting. Simply put, investors have turned somewhat sceptical about gold.

The writer is a policy commentator and a commodities market specialist

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Published on February 10, 2021
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