Crude oil, gold on the rise — for different reasons, though

Commodity markets are showing significant upward traction in prices under the lead of crude oil. Gold and select base metals, too, are rising. Obviously, some optimism is beginning to pervade; but what’s the basis?

The hope of finding a vaccine against the deadly coronavirus is rising. Many countries, especially in Europe, are beginning to lift lockdowns hoping that economic activities will begin to revive. All this translates to a slow return of risk appetite.

So, is this the beginning of a sustained increase in prices after the collapse in recent months or is it some kind of a false dawn? The jury is still out.

Interestingly, in just about a month’s time, crude oil prices have galloped from their record lows. Remember, on April 20, WTI price went into the negative territory because of overflowing storage installations while Brent collapsed well below $20 a barrel.

Now, both WTI and Brent have gained substantially, with the latter testing $35 a barrel and WTI around $31. The price differential between the two stands further narrowed. The drivers are evident. The US oil production is now declining rapidly. The oil rig count is at multi-year lows. Additionally, the OPEC+ production cut has kicked in already.

Demand recovery

At the same time, the demand side is looking less threatening that before. China’s oil demand is reportedly recovering rapidly and may soon reach pre-Covid levels.

No wonder forward prices are even higher. If the optimism holds and price continues to stay north of $30 a barrel, there is every reason to believe the US shale output may not fall any further, but may start to recover (See BL Commodity Commentary May 8 “Will the improving crude oil market sentiment last?”).

If anything, the US administration is providing direct and indirect support including tax rebates to its oil and gas industry, where an estimated 50,000 persons have already lost jobs. Institutional investors and retail investors are showing interest. Rising prices will also attract more speculative capital, which, in turn, is sure to boost the market.

Not to be left behind, gold continues to trade higher, well above $1,700 an ounce, around which it was languishing for some time. On Tuesday, it was at $1,730. Disastrous US economic data and doubts about a sharp recovery in economic activity have combined to prop the yellow metal higher.

Talks of negative interest rates in the US and risk of renewed trade friction with China are adding to the fear. (See BL Commodity Commentary May 13 “Gold in tight range, but bullish conditions are brewing”). Indeed, ETF inflows are rising rapidly.

Haven status

Given the ongoing uncertainties and massive liquidity available, the outlook for gold is constructive. The metal has the potential to test $1,800/oz if economic health conditions were to deteriorate further. Gold will reassert its haven status.

At the same time, the physical demand for gold is going to the dumps. Imports into two of the world’s largest markets — China and India — have collapsed. Rising domestic prices have all but killed retail demand.

Once equity markets begin to improve, there is risk of less-committed investors exiting the yellow metal. When it would happen is anybody’s guess.

The writer is a policy commentator and commodities market specialist. Views are personal.

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