Oil Price Recovering Losses After Starting Year with Drop from 18-month Highs

on Jan 4, 2017

With the U.S. dollar reaching heights last witnessed in 2002, the new year’s first trading session saw oil prices drop back from the 18-month highs reached at the end of last year on the back of a deal between OPEC and a supporting cast of other major oil exporters to cut production levels. Tuesday saw Brent Crude futures drop 2.4% to $55.47 a barrel and WTI 2.6% to $52.33.

However, the session actually began with further gains being recorded as Brent hit $58.37 and WTI $55.24 in early trading. The subsequent swing to the eventual end-of-session losses incurred marked an unusually wide trading range for a single day. A data release in the U.S., which showed that manufacturing activity had expanded in November by more than forecast drove the U.S. dollar index to 14-year highs, hitting USD-denominated oil demand. Oil prices subsequently suffered a sharp reversal in fortunes as currency-adjusted costs soared with the dollar, dampening buyer enthusiasm.

The direction of oil prices over the next few months will be largely influenced by data on how quickly and effectively output cuts are being implemented by oil producers and the knock-on effect to global inventory levels. Market confidence in the OPEC and non-OPEC agreements being honoured will dictate the pace of eventual upward movement. Signs of increased output by other producers such as U.S. and Canadian shale producers will also be carefully watched by market participants.

Wednesday has seen something of a rebound from yesterday’s fall, with Brent Crude back up to $55.92 this morning.
Gold prices have been showing some modest gains to mark the beginning of the year. Some caution in equity markets as participants start to look forward to the real impact of the Trump presidency and the year’s other unknown elements, has given safe-haven gold support. Gold for February delivery hit a 3-week high on Tuesday at $1162 oz.
There is fairly significant divergence among analysts as to what direction gold will take in 2017. Some analysts believe that increasing interest rates and a strong dollar will lead to gold trading lower over 2017 than it did last year. The Gulf Times quoted Karim Merchant, CEO and MD of Pure Gold Jewellers as predicting:
_ “Gold volatility will continue [in 2017]. Prices will move both ways, with overall downward pressure. I expect gold to be in the range of $1,050 to $1,200 [per ounce].”_
However, a recent Bloomberg survey of 26 analysts predicts that gold will rally by around 13% over the course of 2017:
_ “More than two thirds of the analysts and traders surveyed from Singapore to New York said they were bullish for 2017. The median year-end forecast was $1,300, with the year’s peak seen at $1,350. Two, including O’Byrne, said the metal may reach $1,600”._

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