WTI Briefly Pushes Above $100 With OPEC+ In Focus, Gold Rallies As US Real Yields Dump

Key Points

• WTI briefly rallied above $100 and its 21DMA though ended the week closer to $98 with OPEC+ in focus.
• Copper continued to surge on Friday, with focus turning more to supply woes amid a drop in Chilean production.
• Gold also saw further upside, buoyed amid the ongoing drop in US real yields/rally in inflation expectations.

WTI Briefly Rallies Above $100 and 21DMA, Breaks Out of Downtrend

Front-month futures prices for the American benchmark for sweet light crude oil, West Texas Intermediary or WTI, rallied on Friday, breaking out of a downtrend that has been in play since mid-June and briefly surpassing the 21-Day Moving Average just under $100 per barrel for the first time since mid-June. However, since reaching intra-day highs of just shy of $102 per barrel, WTI has since dropped back to just above $98, where it closed out Friday trade with gains of about $1.0.

Sources told the financial press that OPEC+ will consider keeping output unchanged in September when they meet to discuss policy next week, though a modest increase may also be discussed. Market commentators said this highlighted the tight supply backdrop faced by global oil markets, boosting prices on the day.

Even prior to Russia’s invasion of Ukraine that prompted tough sanctions that have seen Russia’s oil output substantially decline, OPEC+ had been struggling to keep up with its own output hikes. According to a report in the Russian media on Friday, OPEC+ compliance with its output pact reached 320% in June, with the group underproducing by 2.84 million barrels per day.

Oil bulls will be pleased with how well the commodity has managed to find support at its 200-Day Moving Average and from March/April lows in the mid-$90s area in recent weeks. US inventory data this week, which showed large drawdowns in US crude and gasoline inventories, eased some concerns about so-called “demand destruction” in the US due to high fuel prices. Meanwhile, the rapid recent rise in equity markets is likely helping, as traders price in a less aggressive rate hiking cycle from the Fed amid weakening growth.

But unlike stocks, oil prices tend to respond much more to economic conditions as opposed to financial conditions. Data this week showed the US economy was already in a technical recession in H1 2022 and global economic indicators in recent months have shown further slowing, weighing on the outlook for global oil demand.

Copper’s Bullish Run Continues Into Weekend

Copper prices surged on Friday to hit new three-week highs as supply side concerns came into focus. Copper rallied 2.75% to near $3.60, taking its gains on the week to over 8.0%. Data showed that copper production in Chile, the world’s largest producer, dropped 4.7% YoY in June. Meanwhile, major global producer Glencore reduced its copper production forecasts for the remainder of the year.

Copper prices have also received tailwinds from other factors this week including 1) a weakening US dollar as traders pare their Fed tightening bets, 2) a surge in global equity markets that has lifted risk-sensitive commodities and 3) Chinese stimulus hopes amid reports the country is taking action to boost infrastructure projects and aid the country’s struggling property sector.

Gold Gains as Real Yields Dump, Inflation Expectations surge

Gold, meanwhile, also gained on Friday. XAU/USD ended the week in the mid-$1,760s, taking its weekly gains to around 2.2%. US real yields have fallen sharply this week as traders price in a less aggressive Fed tightening cycle in wake of this week’s more dovish sounding policy announcement and weak US GDP data.

US 5-year TIPS yields (real yields) fell back into negative territory on Friday and ended the week around -0.09%, down nearly 70 bps from earlier monthly highs in the 0.60% area. A fall in real yields is positive for gold as it reduces the opportunity cost of holding the non-yielding precious metal.

Much of the drop in real yields have been driven by a surge in inflation expectations. US 5-year breakeven inflation expectations (the difference between the nominal and real US 5-year yield) ended the week around 2.85%. That’s nearly 40 bps higher versus earlier monthly lows when the market was pricing a more aggressive Fed tightening cycle.

This might also be offering gold some support. Many investors look on gold as an inflation hedge, as well as a safe-haven asset.