Oil prices are largely flat on yesterday’s close with brent crude futures holding at $54.02 a barrel while WTI dropped by 2 cents to $50.88. Major OPEC producers have been reported as having begun to notify buyers of impending supply cuts, the direct result of the recent pact among members to reduce joint output by 1.2 million bpd from the beginning of January. Kuwait, Abu Dhabi and Saudi Arabia are specifically mentioned as having already done so in a Reuters report. The fact that output cuts are beginning to show concrete signs of materialising has prompted Goldman Sachs to raise its oil price forecast from $55 per barrel for the second quarter of 2017 to $57.5 per barrel for WTI. Brent crude’s price has been revised up to $60 from $55.
However, the investment bank believes that there is limited additional upside for prices before the end of the year and keeps its WTI December forecast at an average of $50 a barrel. The reasoning provided was that inventory rebalancing won’t begin to take shape until supply cuts actually begin to come into force from January. The next catalyst for upward price movement is expected to come in late-January when supply cuts become visible. Total cuts between the OPEC and non-OPEC members who have agreed the deal should be a little under 1.8 million barrels a day and compliance is forecast to be around 84%.
Meanwhile, gold price dropped again on Thursday to hit a 10-month low. Spot gold prices eased 1.2% to $1,122.35 oz. U.S. gold futures for February delivery saw a steeper 2.5% drop down to $ 1,129.80. The 2017 path for gold price is unclear. While increasing U.S. Treasury yields would normally be a negative for gold this may not necessarily be the case if they reflect an increasing rate of inflation, which is a positive for gold.
There are conflicting narratives on short term gold price. On theory is that equity markets are currently looking stretched and an end-of year liquidity drain may lead to profit taking and a drop, which would boost gold. A re-think by markets on 2017 Fed interest rate hikes may also provoke volatility over the next couple of months, another eventuality which would be to gold’s advantage. Historical scenarios have also shown gold rallies in the months following interest rate hike announcements, after falling in the lead up to them.
However, other analysts expect prices to fall further over the next three months with UBS Wealth Management Research cutting its 3-month gold price forecast to $1100-$1250 in a note to clients. Its 12-month forecast is for $1300-$1350.
A couple of soft days for base metals is raising the question of whether there will be an end of year profit-taking sell-off leading to a correction, with prices having shown strong gains over the past few months. 3-month copper prices have slipped 0.3% in London this morning after slipping 0.4% yesterday. Nickel and lead prices fell 1.8% yesterday, though nickel has today bucked the general trend of further softening to gain 0.3%. Reduced liquidity and a potential correction could lead to some end of year volatility for metals according to metals market analysts FastMarkets.