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Commodity markets performed well last week amid concerns over geopolitical events, the direction of interest rates and potentially hot temperatures. Crude oil was underpinned by rising tensions between the United States and Iran, but gains were capped by worries over future demand due to the U.S.-China trade dispute. Gold finished higher for the week, but comments from Fed members capped the recent rally, encouraging investors to book profits. Natural gas rose after government data came in better than expected, while weather forecasts indicated the possibility of lingering heat.
Crude Oil
Recent geopolitical events have helped generate an upside bias in crude oil. After reaching a multi-month low in early June, both U.S. West Texas Intermediate and international-benchmark Brent crude oil futures have gone on a tear. The support has come from both the supply and demand sides of the equation.
On the supply side, prices are being supported by speculators betting that U.S.-Iran relations will boil over into a military conflict. This would likely jam up the tanker shipping route in the Middle East, causing a supply disruption and sharply higher prices. Oil experts surveyed by CNBC do not expect the U.S. to have any meaningful discussions with Iran until at least six months, and more than half see either no direct military confrontations or just minor skirmishes. In the meantime, the story is just enough to sustain an upside bias.
Demand side bulls are also paying close attention to the outcome of the Trump – Xi meeting at the G-20 summit. Renewed trade talks should underpin prices, but bullish traders would really like to see a deal reached to end the trade dispute. This would ease tensions over a global recession and lower demand.
One major concern for traders remains the oversupply caused by rising U.S. shale although stockpiles have fallen more than expected the last two weeks.
Gold
Gold started the week strong but ran into a wall of sellers after Fed officials dampened hopes of a 50 basis point rate cut by the central bank in late July. The comments were enough to trigger a rise in Treasury yields which made the U.S. Dollar a more attractive investment. This helped reduce demand for dollar-denominated gold.
Investors were rattled after Powell failed to confirm the expected half-point rate cut. He reiterated his message from a week earlier and talked about the uncertainties facing policymakers.
“The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” Powell said in brief remarks ahead of a moderated discussion at the Council on Foreign Relations in New York.