Oil Weakens On Iran Prospects, Gold Steady – OANDA

March 3, 2022

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By Anna Peel. Originally published at ValueWalk.

OANDA – Stocks edge lower, No surprises from Day 2 of Powell, Oil weakens on Iran prospects, Gold steady, Bitcoin rally exhausted

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US stocks went on a bumpy ride as investors continue to trade off every incremental update with the Ukraine-Russia conflict and following a wrath of mixed US economic data. Stocks were under pressure early after a French official said President Macron’s conversation with Vladimir Putin did not provide any reason to be optimistic that we could see a de-escalation/ceasefire. Wall Street was disappointed after the ISM Service Index posted a third consecutive decline, with business activity, new orders, and employment posting hefty declines. The end of the omicron impact is likely to be impacting the soft ISM Services PMI report, so expectations should be high that a rebound occurs in March.

Risk appetite attempted to make a comeback after Presidential advisor Mykhailo Podolyak said Russia and Ukraine would have a third round of talks. Stock traders face a very choppy market going forward that will likely see pressure as inflationary pressures increase across the board, which will eventually trigger much more aggressive central bank tightening. Investors will struggle to find a reason to pile back in aggressively in stocks until a major de-escalation with the Ukraine-Russia conflict occurs and inflation shows signs of easing.

Fed

Fed Chair Powell’s testimony reminded traders that aggressive Fed tightening was still possible if the Russia-Ukraine war leads to longer-lasting inflation. The Fed is still prepared to deliver a series of rate hikes and that they are prepared to do whatever it takes to have stable prices. Powell believes that the labor shortage problem will keep the labor market overheated.

Traders will await to see if the February employment report shows hiring remained robust, which should pave the way for the Fed to deliver a steady stream of rate hikes despite all the uncertainty with the full impact that the war in Ukraine will have on the economy. Tomorrow’s nonfarm payroll report is expected to show 415,000 jobs were created in February.

Oil

Crude prices are ping ponging back and forth as energy traders remain focused on the fallout from Russia’s invasion of Ukraine and as Iran inches closer to a nuclear deal. In early trade, WTI crude rallied to the highest levels since 2008, after the Russian military captured the Ukrainian city of Kherson. Expectations for another round of Russia-Ukraine talks led to some hope that a possible ceasefire could be agreed upon but talks seem to have been pushed into the beginning of next week.

Iran could secure a nuclear deal this month and that means the 80 million barrels of oil in storage could hit the market fairly soon. Iran’s energy minister noted that Iranian production could hit maximum capacity in one or two months after a nuclear agreement is reached. Iran nuclear talks are entering the final stage and that should put a short-term cap with the recent rally in oil prices.

Oil price weakness extended after White House Press Secretary said, “We don’t have a strategic interest in reducing the global supply of energy, and that would raise prices at the gas pump for the American people.” It looks like the Biden Administration won’t be banning Russian oil anytime soon and that might suggest we could see some exhaustion in the crude price rally.

Gold

Gold prices remain supported on safe-haven flows as the Ukraine-Russia conflict intensified. Russia’s military offensive has advanced in Southern Ukraine and potential talks got pushed back until next week. Uncertainty over the war impact is hitting investor sentiment hard in Europe and that has provided some underlying support for gold.

Gold seems to be steadying above the $1900 level, but still lacks a clear catalyst to make a run towards the $2000 level. Gold still looks like an attractive trade, but other commodities are clearly outperforming. Global growth concerns will eventually become recession fears and that should be the key catalysts to send gold higher, but that might take a while longer.

Bitcoin

Bitcoin’s rally is starting to show signs of exhaustion. Bitcoin needs risk appetite to be healthy for prices to make a run above the $50,000 level, so it should come as no surprise if prices consolidate around the $40,000 level.