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Commodities Week Ahead: Oil, Gold In Final Risk-Vs.-Fear Battle Of 2021

By (Barani Krishnan/ 27, 2021 07:52
Commodities Week Ahead: Oil, Gold In Final Risk-Vs.-Fear Battle Of 2021
By (Barani Krishnan/   |  Dec 27, 2021 07:52
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If you trade, then congratulations for making it this far in a volatility-wracked year. 

With just a week left to 2021, the risk versus fear battle enters its final phase as oil bulls try to round the year out in the higher $70s (or $80, if possible) while gold longs work to reinforce the $1,800 berth they’ve clung to over the past week.

Yet, with thinner-than-usual year-end volumes and continued drama on the COVID front, price swings are far from over in both, especially crude.

WTI Weekly Chart
WTI Weekly Chart

Airlines called off thousands of flights in the United States over the Christmas holidays from a combination of bad weather and new caseloads of infections from the Omicron variant of the virus.

Flight aside, at least three cruise ships were forced to return to port without making scheduled port calls after COVID cases were detected on board.

Omicron Pressuring Travel, Oil Prices 

The Christmas and year-end holidays are typically a peak time for travel, accounting for healthy jet fuel consumption. The last time the aviation industry enjoyed such a bonanza was in 2019 before the global breakout of the coronavirus pandemic.

One reason airlines have been forced to cancel flights is due to pilots and cabin crew needing to quarantine after testing positive for the coronavirus or being exposed to those confirmed to have been infected.

Omicron was first detected in November and now accounts for nearly three-quarters of US cases and as many as 90% in some areas, such as the Eastern Seaboard. The average number of new US coronavirus cases has risen 45% to 179,000 per day over the past week, according to a Reuters tally.

While research suggests that the fast-spreading Omicron is less lethal than the original COVID-19 strain that broke out in March 2020—as well as the Delta variant, which emerged late last year, but only became a factor this year —few are taking chances once they or those they have been in touch with are infected.  

But many people are also defying calls for caution or taking calculated risks as vaccines and boosters against the virus remain readily available and new treatments—such as the world’s first COVID pill by Pfizer (NYSE:PFE)—get approved by the day.  

A White House official, who asked not to be identified, was quoted saying by Reuters that despite the mess at some airports, "we're in a better place than last Christmas" and noted "only a small percentage of flights are affected."

The continued drama over Omicron saw crude prices moving some 0.5% down in Monday’s early trading in Asia, with fairly good chances for a rebound in the European and US sessions.

By 10:30 AM in Singapore (9:30 PM New York), West Texas Intermediate, the benchmark for U.S. crude, hovered under $73.50 a barrel, after settling up 4% last week at $73.79 per barrel. 

Year-to-date, WTI is up 51%, after ending 2020 down 21%. But the US crude benchmark has also seen extensive swings over the past 2-½ months, hitting seven-year highs of $85.41 in mid-October before tumbling under $65 from there. 

Gold's Luster Could Increase In 2022

Gold Futures Weekly Chart
Gold Futures Weekly Chart

In the case of gold, the most active February futures contract on New York’s COMEX held above the $1,811 an ounce level it closed at on Friday for its highest settlement in five weeks as the yellow metal found favor again with those seeking a hedge against inflation.

Gold has traditionally been touted as a hedge against inflation, although that argument was weakened earlier this year as the yellow metal’s prices steadily fell in the face of ramping price pressures in a U.S. economy rebounding aggressively from the coronavirus pandemic.

Gold has rallied lately despite the Federal Reserve announcing an expedited timetable for ending its pandemic-era stimulus and raising interest rates for the first time since the COVID-19 outbreak of March 2020. The Fed has said it could have as many as three rate hikes in 2022.

Ed Moya, analyst at online trading platform OANDA, said on Friday after the Federal Reserve’s closely watched inflation barometer—the Personal Consumption Expenditures Index—released Thursday, grew by 5.7% in the year to November:

“Gold should have a strong 2022 as the risks to the outlook remain elevated.” 

Historical data showed it to be the largest annual growth in the so-called PCE in 39 years. Prior to this, data showed the U.S. Consumer Price Index, or CPI, rising 6.8% in the year to November, growing at its fastest pace since 1982. U.S. producer prices also jumped by a record 9.6% year-on-year in November.

News of rate hikes are almost always bad for gold. This time though, traders in bullion appear focused on the U.S. inflation story, allowing gold to play its traditional role as a hedge against that, although strong Fed action to right the situation could still be negative for the yellow metal. 

Year-to-date, gold is down almost 5.5% after soaring to just shy of $1,980 in January and tumbling to a 17-month low of $1,680 in August. Last year, it finished up 22% after hitting all-time highs above $2,120 in August 2020.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Commodities Week Ahead: Oil, Gold In Final Risk-Vs.-Fear Battle Of 2021

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Commodities Week Ahead: Oil, Gold In Final Risk-Vs.-Fear Battle Of 2021

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