Oil Boom, Gold Bust?

Oil surged past $50 to its highest price in four months based on a casual OPEC meeting on supply cuts and the significant drop in US crude inventories. At the same time, gold dropped to its lowest level in four months. Conspiracy theories were rife.

The Wall Street Journal reported that Saudi Arabia sent their energy minister with a mission to make a deal with Iran that would not compromise its fight for oil market share. By the end of the meeting–for the first time in eight years–it was agreed that production would be cut by 1-2 percent. This sent the price per barrel over $50 for the first time since June.

Falling US Inventories

On Wednesday, the US Energy Information Administration announced that crude inventories were down 3 million barrels for the week ending Sept 30th 2016. This makes the fifth week that inventories are in decline which means approximately 26 million barrels have been drawn down since the beginning of September.

Carsten Fritsch, commodities strategist for Commerzbank in Frankfurt, told Reuters, “It’s really crazy these markets. Prices rise, regardless of the news flow and any dip is seen as a buying opportunity.” The price of oil has fallen from above $100 in 2014 to $26 this year with no stability in sight. OPEC’s policy meeting is scheduled for November 30th in Vienna.
It is rumored that at this point, Saudi Arabia is shouldering the lion’s share of the reduction, reducing its output by as much as 5 percent with countries like Iran, Nigeria and Libya continuing at the previous production level.
If you hold stock in the major oil companies, you were certainly smiling with the tremendous gains you have made since February this year. The biggest winner in terms of company valuation has been Chevron (NYSE:CVX) which is up $36.7 billion dollars or 23.4 percent in that period. Williams (NYSE:WMB) has gained $13 billion, which is an incredible increase of 131 percent since February.
Profits are being reported now, but the news will not all be good as these prices are only just starting to hit the balance sheets. Estimates suggest that Chevron will report a drop in profits of 63 percent to about $5 billion but are excited by the prospect of a recovery next year.

Here comes a hurricane

After OPEC putting the pinch on, US markets are wary about a potential interruption in oil supply due to Hurricane Matthew. Phil Flynn, senior analyst at Price Futures Group, told Marketwatch, “Hurricane Matthew is barreling toward the East Coast, US oil supply continues to fall and OPEC and non-OPEC oil producing nations are getting ready to meet in Istanbul to hammer down details of a joint oil production cut,” he adds, “For energy, the track of the storm looks to be a bigger threat to demand than supply but in the near-term, it will further reduce US oil supply that has fallen at a historic pace over the last 5 weeks.” He said in a research note on Thursday, “Oil tankers are being diverted to other ports or will wait out the storm and that could delay imports by as little as four days or in some cases, it could be weeks.”

At the same time oil was running, gold was declining, but that could be a perfect buying opportunity for gold consumers in China and India, the world’s largest markets. Religious holidays Diwali and Dussehra, and the wedding season in India will stimulate imports over the coming months. This recent drop in the gold price coincided with a holiday in China which some market watchers said was no coincidence, but traders working to cover their short positions.
Next week will test these theories.
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Securities disclaimer Securities Disclosure: I, Nick Smith, hold no direct investment interest in any company mentioned in this article.