Gold and Oil Outlook Tied to Fed and Ukraine
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The entire commodities spectrum rallied in the first half of 2022 as the war in Ukraine sparked major supply concerns for energy and agricultural commodities. But heading into 2023, it is demand concerns that have taken over and are clouding the outlook. Gold and oil have lost their shine amid worries that the Fed and other central banks may overtighten, and that China is not doing enough to boost its economy after a year of jumping in and out of lockdowns. Will there be a turning point in 2023 or are even deeper losses in store?
Will gold shine more in 2023?
Historically, gold was considered a safe-haven asset, but that narrative changed this year. Yes, it hit a record high in August 2020 as investors sought shelter in precious metal due to the outbreak of the coronavirus pandemic and came just shy of retesting that record in early March following Russia’s invasion of Ukraine. That said, it was all downhill thenceforth, even as concerns about the performance of the global economy remained elevated.
With inflation getting out of hand due to the supply shortages caused by the pandemic and the war in Ukraine, central banks around the globe are prioritizing the fight against inflation rather than restoring economic activity. Ergo, as interest rates around the globe rose at a fast pace this year, at least up until a couple of months ago, the non-yielding gold lost its allure. The title of the ultimate safe haven was passed to the US dollar as with the Fed raising rates more aggressively than other major central banks, it became the only safe-haven currency that also offered high yields. Gold has therefore developed a positive relationship with equities, while reinforcing its negative one with the dollar.
That relationship is also the reason why the precious metal has staged such a comeback in November. With inflation in the US coming down faster than previously anticipated, investors have significantly lowered their expectations with regards to the Fed’s future course of action.
A worsening of the global outlook in the coming months as the effect of higher interest rates continue to be reflected in the data could well weigh on equities, while the dollar could attract some safe-haven flows, resulting in another leg south in gold. However, with the base effect of the rally in oil prices expected to drop out from the year-on-year consumer-price calculations in coming months, headline inflation may continue to come down in 2023. This would add credence to investors’ assessment of a potential Fed pivot sooner rather than later and may limit any losses in the yellow metal.
Combined with deeper economic wounds, expectations of lower interest rates during the second half of 2023 could even allow bullion to reclaim its safe-haven status in an environment where yielding assets are not as attractive anymore. Therefore, even if gold pulls back at the start of 2023, it could very well shine again thereafter, perhaps during the second quarter or second half of the year.
A potential retreat in gold could encourage some buyers to enter the game from near the $1,680 zone which acted as a floor between April 2020 and July 2022. If the rebound is strong enough to take the metal above the $1,805 zone, the rally could extend towards the high of April 18, near the psychological round number of $2,000. For the picture to turn bearish again, a break below the temporary floor of $1,615 may be needed, as this will confirm a lower low on the weekly and monthly charts.
As crude oil languishes, a comeback cannot be ruled in 2023
It is no exaggeration to say that it’s been one big rollercoaster year for crude oil. Having started 2022 at $75 a barrel, oil prices skyrocketed soon after, spiking above $130, as the terrible events unfolded in Ukraine. But with 2022 almost over, oil prices have wiped out all those gains amid growing pessimism about the demand outlook.
The concerns primarily centre on the expectations that the major economies are headed for recession, with some likely already in one, even as it becomes increasingly difficult for Russia – the world’s second largest oil producer – to tap into the oil market. Russia’s war on Ukraine prompted several countries to restrict Russian energy imports, amongst a host of other products. But those sanctions have just gotten a lot tougher.
The G7, along with the European Union and Australia, have agreed to implement a price cap on seaborne Russian oil. The way the price cap works is complicated and there are question marks about how successful it will be. The Americans and Europeans effectively want to prevent Russia from selling oil at a price higher than $60/barrel with the intention of slashing Moscow’s oil revenue. But there is a cost, as they would further cut off Russian oil from the market at a time when energy prices remain relatively high.
The threat of supply tightening significantly over the course of the year is the biggest upside risk for the commodity in 2023, something that could be accentuated if demand from China continues to stabilize or even start to increase soon. But that’s not all.
Looking further afield to next winter, there is a danger of another positive shock for oil and other energy prices. A mild autumn in 2022, the ability of European nations to stock up on oil and gas before the sanctions fully kicked in, and demand destruction caused by the price surge from earlier this year have all contributed to energy prices sharply coming off their March and June peaks.
Unless there is additional demand destruction, which would be extremely difficult without a steep global recession and even more so if China reopens its economy, oil supply could tighten substantially further, pushing prices higher again in the second half of 2023.
But this isn’t the only uncertainty that hangs over the outlook. It is yet unclear to what extent the oil price cap will impede the flow of Russian oil and whether OPEC would attempt to offset those losses with a production increase. Moscow has said it will not agree to the price cap, although it is already being forced to sell at a heavy discount from the market price amid the ban from many countries.
If Russian oil continues to make its way into the market, and let’s not forget, it was never the West’s intention to completely block all exports as that’s not desirable for neither side, there may be more downside for oil futures in 2023, at least in the first half.
