Oil prices suffered their sharpest decline in since the middle of last January yesterday, falling 2% from levels close to the peak of recent trading ranges. Brent crude fell $1.11 to $55.59 a barrel and WTI lost 1.7%, or 93 cents, to $52.93. For both benchmarks the drop was the heaviest seen since January 18th and came despite OPEC’s monthly report showing 93% compliance with agreed output cuts. The compliance levels, led by Saudi Arabia who showed a 700,000 barrels a day cut in output, more than their commitment under the December agreement, are a new record for comparable OPEC deals historically.
However, with the dollar strengthening on the expectation that Trump’s administration will announce significant corporate tax cuts, and oil prices unable to break through resistance that has kept it within a $5 dollar channel in recent months due to evidence of increasing production in the U.S., yesterday saw a correction. Markets seemed to have already priced in OPEC compliance levels around those reported yesterday, which were largely ignored, and dollar strength provided the downwards pressure.
This morning has seen prices steady and bounce back slightly with Brent crude up 30 cents to $55.89, having earlier seen further losses sustained during the U.S. session. WTI rose 25 cents to $53.18, putting both back into the middle of their trading channel. With oil prices normally considerably more volatile than has been seen of late, markets are clearly not going to allow them to break out of the present range until there is clear evidence in the shift in the power dynamic of OPEC cuts and rising output in the U.S. OPEC believes their cuts will start to drain the global supply glut over the coming months but some market participants believe their pace, and possibly even volume, will need to be hiked if that is to happen.
Gold prices have, meanwhile, been making subtle headway this morning in advance of Federal Reserve Chair Janet Yellen providing clues on the central bank’s policy later today. Yellen will testify to Congress on Tuesday and Wednesday this week and markets are most interested in the possibility that the Fed will hike rates by more than the 2 0.25% steps accepted as given for this year. If she indicates the Fed is erring towards a third hike, that would be expected to put pressure on gold’s price as it would lead to further strengthening of the dollar decrease the attractiveness of non-income earning safe haven assets.
Prior to markets opening in London this morning, the spot gold price had gained 0.3% to $1228.9 oz and Comex gold futures 0.4% to $1230.6.