Oil, Gold Forecast: Two trades to watch

Oil Rises as U.S.-Iran Peace Hopes Fade

After falling for the past two weeks, oil prices are rising on Monday, gaining almost 3% as developments in the Middle East remain in focus.

Between the return of Iranian oil and ongoing U.S.-Iran tensions, oil prices are likely to remain volatile in the near term.

Over the weekend, President Trump refused an Iranian ceasefire, increasing uncertainty over when the Strait of Hormuz may reopen. Trump also warned that the bombing of Iran would resume after the midterm elections, adding to the geopolitical risk premium on Brent and WTI.

At the same time, physical supplies are improving. Data from Kpler showed that in September, crude supplies from OPEC countries increased to 12.8 million barrels per day. This marks the highest level since the conflict in the Middle East started in February. The increase was mainly attributed to higher oil loadings from Saudi Arabia and the UAE.

The rebound came following a recovery in exports through the Strait of Hormuz, which were set to reach 7.4 million barrels per day this month, as well as a recovery in Saudi Arabia's exports from the Red Sea port of Yanbu following the reopening of its East-West pipeline.

However, the rebound means that production is still around 6 million barrels per day below February levels, when it was 18.8 million barrels per day.

Saudi Arabia was on track to ship around 5.4 million barrels per day this month, rebounding from 2.4 million in August.

Attention will remain on developments in the Middle East. Trump has said he expects negotiations with Iran to resume this week, with Qatar acting as a go-between in an effort to revive talks. However, while talks could resume this week, there is little sign of a breakthrough.

The market will also continue watching refined product supplies closely. Diesel prices in Europe and the U.S. have reached record highs as disruption to oil and product exports from the Middle East has tightened markets.

The rise in oil prices is not only affecting energy markets but is also hitting global bonds and stocks as inflationary concerns rise.

Without a clear sign of progress on negotiations, oil prices could continue to grind higher.

Oil Forecast – Technical Analysis

After running into resistance at $106.75, oil moved lower before finding support at the 50 EMA around $90, keeping the constructive outlook intact. From here, the price has recovered and is now testing resistance at the 38.2% Fibonacci retracement of the $55 low to the $120 high at $95.

A rise above this resistance level opens the door back towards $100 a barrel and then $105, the 23.6% retracement and September high.

A break below the 50 EMA around $90 and the 50% Fibonacci retracement at $88 would see sellers turn their attention towards the 200 EMA at $82.50, ahead of $80, the 61.8% Fibonacci retracement.

Gold Breaks Down on Hawkish Fed Expectations as Treasury Yields and USD Rise

Gold prices are falling sharply, dropping to a seven-week low, as high oil prices stoke inflation fears and strengthen the case for the Fed to keep interest rates higher for longer.

Spot gold trades around 3% lower at $4,156 per ounce, hitting its lowest level since August 5.

The move lower comes as oil prices jump 3%, adding to inflationary fears and lifting U.S. Treasury yields and the U.S. dollar. This not only increases the opportunity cost of holding non-yielding gold, but also makes the U.S.-dollar-denominated precious metal more expensive for holders of other currencies.

The market is pricing in a 70% chance that the Fed will hike interest rates again in October after a 25-basis-point increase in September. Last week, Fed speakers leaned hawkish, warning about persistently high inflation and the need to tighten policy to bring inflation back towards the 2% target.

Attention this week will be on a series of U.S. economic releases, including:

• ADP employment report
• Core PCE, the Federal Reserve's preferred gauge for inflation
• Non-farm payrolls

Signs of sticky inflation combined with strength in the jobs market could cement October Fed rate-hike expectations, supporting Treasury yields and the U.S. dollar while pulling gold lower.

Until the Federal Reserve closes the door on further rate hikes, Treasury yields and the dollar fall, and oil prices weaken, gold could remain under pressure.

Gold Forecast – Technical Analysis

After running into resistance just below $4,700, gold has fallen lower. The price trades below a near-term descending trend line and has broken below the 50 and 200 EMAs, dropping to $4,150, a level last seen in early August.

Sellers supported by momentum will look to extend losses towards $4,100, the March low, before attention turns to $3,940, the June low.

On the upside, any recovery would need to retake $4,330, the 50 EMA, and the 23.6% Fibonacci retracement of the $5,598 high and $3,940 low. Above here, the price becomes more stable and buyers will look towards $4,500, a round number, ahead of $4,573, the 38.2% Fibonacci retracement.

A rise above $4,700 would create a higher high.