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Commodities Week Ahead: New Flare In US-China Battle Hits Oil, Metals

Published 06/08/2018, 07:31
Updated 02/09/2020, 07:05

US crude oil’s resilience at the high $60 levels will be tested again this week as the US-China trade war reaches a new flashpoint that could send more investors toward the relative safety of the dollar, weighing again on gold, copper and other industrial commodities.

In US agriculture, oat is expected to retain its winning streak, with technicals suggesting a “Strong Buy” after last week’s near 8% rally that catapulted the cereal to 6-month highs.

Beijing listed last week $60 billion of US goods it will target for tariffs to counter Washington’s planned duty hike on $200 billion of Chinese imports, showing neither side is ready to blink in the five-month-old trade battle. Both nations imposed matching tariffs last month on $34 billion apiece of each others’ products and have plans to add another $16 billion worth of goods to their lists, which cover products from steel and aluminum to washing machines and even dried fruit.

China has also warned of levies on US crude, which it has become the second largest buyer of. Even without such a threat, oil’s critical importance to the global economy makes it vulnerable in any trade war, especially one involving the world’s top two economic superpowers and energy consumers.

Trade War Casting A Cloud

“It is casting a cloud over most asset markets, including oil,” Dominick Chirichella, analyst EMI DTN in New York, said of the trade row, although he added that minus the rhetoric “I do not believe this will be a long-term issue, and over the next several months, I am expecting to see progress toward a negotiated settlement.”

WTI Daily Chart

US West Texas Intermediate crude has had net losses for six straight weeks, with Thursday’s near 2% rebound preventing a bigger decline last week. From 3-1/2 year highs above $75 per barrel at the start of July, WTI settled on Friday at $68.49 per barrel – down 7% on the month and almost 10% off from this year’s peak. UK Brent, the global benchmark for crude, has lost similarly, settling at $73.21 from highs of $80.50 hit in May.

Investing.com’s daily technicals call for a “Neutral” on WTI, with Fibonacci support levels earmarked at $68.51, $68.46 and $68.40. Resistance was pegged at $68.63, then at $68.68 and later at $68.74. The pivot was seen at $68.57.

Lower Inventory And Rig Count Could Redeem WTI

The wild card for WTI will be weekly U.S. crude storage data. Stockpile figures for the week to July 29 showed a surprise build up of 3.8 million barrels versus a forecast drawdown of 2.8 million barrels. Even so, a large inventory drop this week could put WTI on a fresh course to reattempt $70.

“Mixed signals from large inventory and export swings driven by a volatile Brent-WTI arbitrage has exacerbated price moves between $67 and $70 per barrel,” TD Securities noted in its weekly outlook on oil.

Declines in US oil rig numbers could also provide a fundamental push higher.

The rig count for the week to Aug 3, reported by oil services firm Baker Hughes, showed a 2-unit drop – barely material to production but significant, nevertheless, to the psyche of oil bulls concerned about demand for WTI amid the China tariff threats and growing global inventories.

Output from top oil exporter Saudi Arabia has recently increased to around 11 million bpd, and U.S. production has also come around to those levels. Russia, meanwhile, pumped an additional 150,000 barrels per day in July from a month earlier, to reach 11.21 million bpd.

Copper, Gold Could Wilt As Dollar Rises

All things equal, the dollar could rally for a third week, hitting not just oil but also gold and copper as investors look for safe bets.

The dollar index reached a 95.19 peak last week, inching toward mid July’s one-year high of 95.44. Investing.com’s daily technicals have a “Strong Buy” on the currency, with Fibonacci patterns citing first resistance at 95.13, second at 95.22 and third at 95.37. Support was first pegged at 94.83, then at 94.74 and later at 94.59. The pivot was seen at 94.98.

Gold 300-Min Chart

Gold rebounded last week after four straight weeks of losses that took U.S. futures of the precious metal to a March 2017 low of $1,205.10 an ounce. Few, however, think bullion is out of the woods, particularly with daily technicals still suggesting a “Strong Sell” and a break of the $1,220.90 support for a stronger path upward to begin.

The story isn’t much different with copper, which has so far ignored an impending strike at the Chilean Escondida mine, which contributes about 5% of global supply. Fibonacci patterns indicate support at $2.734 per lb versus Friday’s settlement of $2.748.

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