Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter


Gold Up Oil Down – Fundamentals Win

Commodities / Gold and Silver 2013 Jul 11, 2013 - 04:25 PM GMT

By: Andrew_McKillop


On February 8 this year Reuters reported that east hemisphere benchmark crude Brent commanded a premium of over $23 a barrel against US benchmark WTI. As of 11 July, with WTI prices soaring past $106 a barrel to reach their highest since March 2012, the premium is down 90% to $2.15 a barrel.

 Although it took a while for oil traders to adjust their minds to reality, they did adjust – downwards.

The same gravity-pull of real fundamentals will also apply to the oversized triple-digit dollar prices for both Brent and WTI, but again with time. Another distorted “arb trade”, between physical bullion prices  and “paper gold” ETFs with their related instruments is also set to adjust – upwards.

In a real sign of the times for oil's longstanding “arb” trading and its former highly profitable role for market manipulators, Goldman Sachs said in early July it had closed down its spread trade recommendations after the ICE Brent-Nymex WTI premium fell below its target of $5 a barrel. Goldman tried to save face by claiming the premium would be back above $5, “sometime”.

This may not at all be the case, due to basic fundamentals. The same real world surely and certainly applies to gold. Here, the “arb trade” focuses the clash of physical bullion demand, especially strong in Asia, and the supply of “paper gold” ETFs and related instruments, especially strong in Western and other stock exchanges.

Oil analysts charting and predicting the now-almost-disappeared Brent premium drew on factors that featured concern about stockpiles of crude at the US Nymex basing point at Cushing, Oklahoma. They also took a look at refinery utilisation and pipeline or rail transport infrastructure issues inside North America, but the WTI-Brent spread mainly reflected big-picture fundamentals, with a major role in determining the directional flow of world crude exports.

Bringing in the Baltic Dry Index for shipping freight rates  - the BDI at present weakly recovering from extreme lows through its “annus horribilis” of 2012 - and using the WTI-Brent spread, major Middle-Eastern and African producers decided whether to ship their crude to Asia and Europe, or to the USA.

The EUR premium against the USD, or dollar discount against the euro, also shaped their decision.

Since 2009, accelerating all the time, the shale energy revolution in the US producing ultra light low sulphur crude and condensates, and the very slow recovery of US domestic oil demand, are signaling a future where eastern hemisphere crude producers will no longer have the luxury of choosing their market. They will be market takers and price takers – a revolutionary change! Inside OPEC this clear threat is taken seriously. Some of the hardest hit members like Nigeria producing very light low sulphur crudes, similar to WTI, are seeing their US-destination shipments fall like a stone – by more than 25% so far this year – falling just like the Brent premium.

Brent serves as the benchmark for markets including Europe, Japan, India and China. The long and steep decline in EU27 and Japanese oil demand was more than just compensated, for years, by the ever-growing oil consumption and fast import demand growth of the Asian Locomotive economies – but that has seriously tailed off.

Forward signals are looking increasingly negative for Chinese and Indian import demand recovery. Conversely oil demand recovery potential in the developed countries, we can say, is somewhat less unrealistic in the US than in Europe and Japan. The readout is that any discount for WTI against Brent has even less reason to exist, taking demand trends into account.

For weeks we have gotten used to the “New Abnormal”. Gold pushes down and oil pulls up – but pushing or pulling on either of these two strings has limits.

In recent weeks we saw gold prices slashed and slashed again. Each recovery was only a false dawn, while oil floated high and free, escaping the commodities carnage – standing out like a sore thumb among the commodities. The lifetime for this game, however, is not unlimited – or set by Goldman Sachs - but is set by fundamentals.

Unlike global oil demand, physical gold demand is impressive. Data from Wikileaks and other sources suggest Hong Kong-plus-China buying in Jan 2012-May 2013 printed 1500 tons. Oil demand is conversely a never-ending tale of large stocks, rising output and real world decline in most major markets - countered only by hopeful reports of “recovery coming”, most recently from OPEC, predictable relayed by the IEA, which perhaps not known to some has a “high oil price mandate”.

The potential for a major gold and oil price turnaround is making itself felt. Fundamentals are in no way bearish for gold, but those for oil are even more bearish than they were, for example, in April when WTI prices dipped below $90 a barrel several times. To be sure, when the speculative trading machine runs only in advance mode, finding reverse gear is difficult. Exactly the same is also shown by the big picture of equities, floating high and free from trifling details such as real world economic data, P/Es or the Fed's taper down threat.

Like equities and oil for the bulls, the gold price rout for the bears reinforced itself with the easy money made from the one-way-down story of bear attack.

For oil, the Speculators have added a premium to oil prices and car fuel costs at the pump, maybe enough to seriously influence consumer habits this summer driving season, but they have also set a discount price window for physical gold. In Asian markets, notably, gold at bargain prices has proven, and is proving attractive – while Chinese and Indian buying of “classic commodities” like iron ore and oil have wilted.

Add in China's now serious and open banking solvency issues, plus its “shadow banking” crisis, and physical gold buying by private citizens is easy to understand.

An emerging currency crisis of emerging market economies is becoming clearer every day, harder to deny each day – providing a likely boost to the dollar. Surely to the discomfort of Ben Bernanke, a stronger dollar will add its own headwinds for the Brent and WTI price in dollars. The anticipation of a stronger US dollar, in Asia, will speed short-term demand for gold.
Overall, headwinds for the oil market are numerous. Themes taken as New Normal for years, including the BRIC-emerging markets commodity supercycle, the supposed unstoppable growth of China's oil demand, the supposed unstoppable US dependence on oil imports, the always weak US dollar, the disconnect between supply-demand fundamentals and oil prices - are all under attack. New paradigms are replacing these relics.

Current gold price and oil prices are unrealistic, to say the least. WTI in the high-eighties, Brent about the same, and gold closing back to $1500 are the outlook. Only the timetable for adjustment is clouded and while the change can be rapid – like the more than 90% fall of the Brent premium in 5 months – the adjustment to reality may be fought by the Speculators who profit from New Abnormal.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

Andrew McKillop Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules