Author: Roman Tkachuk, participant of the Analyst Contest
In the first half of this year oil prices rose by 60% from their 12-year low (hit in February). The uptrend for Brent was broken in June from the point of view of technical analysis. We believe that the “oil rally” is over and do not expect Brent to go above $55-60 per barrel in the coming months. It’s more likely that oil quotes will remain in a $45-50 range per barrel during this period.
Figure 1 Brent chart from 08/15 to 17/16
Rising oil prices in the beginning of the year led to a growth in the production of oil in a number of countries. According to the S&P Global Platts survey, OPEC oil production in June rose by 0.3 million barrels to 32.73 million barrels per day: an 8-year maximum. Production has increased in Nigeria ( 150,000 barrels per day), Libya ( 60,000 barrels per day), Iran ( 80,000 barrels per day), Saudi Arabia ( 80,000 barrels per day).
In addition, production has increased in Canada, recovering after the fires. Exports from Russia in June rose by 4.5%. According to Baker Hughes data, the number of active drilling rigs in the United States of rose to 351 last week. We believe that oil producers take advantage of Brent prices above $50 to increase production. The markets do not pay attention that U.S. stockpiles declined 2.22 million barrels last week, according to Energy Information Administration data last Wednesday. U.S. inventories have been dropping for eight weeks. It is longest run of declines since 2015.
Gold has advanced with silver in 2016 as investors seek a haven from slowing global growth and the fallout from the U.K.’s referendum on leaving the European Union. Gold has risen by 30% since January 2016, with silver rising by 40%. This week the markets enabled “Risk on” mode, so gold quotes dropped slightly.
U.S. government data showed funds have increased their net-long futures and options positions in gold to the highest since data began in 2006. Investors have boosted holdings amid speculation about stimulus from central banks throughout the world. The Bank of England may cut rates at a meeting this month. Also, investors are waiting for new fiscal stimulus from the Japanese Prime Minister, Shinzo Abe. These facts speak in favor of the growth of gold. So, in August, with its increased market risk, gold may again be in the spotlight
Further gold dynamics will depend on the actions of central banks. Also do not forget about shocks to world markets in August in previous years. On this basis, investors in the coming week may prefer traditional save heaven.
Figure 2 Gold chart for the past year
As we have seen, this week’s risk-on sentiment is driving world stock markets. European stock indices fully restored their losses after Brexit. The S&P 500 and DJIA updated their absolute highs. Emerging-market stocks rose to the highest level in eight months. The main reason is expectations of stimulus and quantitative easing in major economies.
Figure 3 S&P index chart from the past year
The Brexit vote was originally estimated as a risk for the markets. Now the U.K.’s vote to leave the European Union has bolstered prospects for monetary stimulus in major economies, boosting demand for riskier assets. Investors are closely watching comments of Federal Reserve officials on the time rates are to be lifted. Futures contracts show a 34 percent chance the Federal Reserve will raise interest rates by the year’s end.