Growing anxiety over Russia’s potential invasion of Ukraine is providing the geopolitical drama to keep the rally in oil bubbling, despite a plunge in US gasoline demand and the upcoming Federal Reserve meeting to discuss its first rate hike in two years.
Gold prices are perking too, albeit cautiously, as longs attempt to reach the higher $1,800-an-ounce level, despite the risk of a disproportionate spike in US Treasury yields and the dollar.
Typically, rate hikes benefit the dollar and tend to weigh on commodities denominated in the currency, including gold. But the yellow metal is also a hedge against inflation and is being held up by 40-year highs in US prices.
On the oil front, prices pushed higher again as trading for a new week began after a rally that had already led to a 14% windfall this year for longs in US crude and 12% for those holding London-traded Brent. 
Oil prices have climbed with few stops for five straight weeks, although Friday’s trading saw a dramatic 5% plunge that was mostly reversed by the close. That tumble was triggered by worries about US gasoline inventories that had piled up in three previous weeks and Wall Street’s worst weekly rout since the start of the coronavirus pandemic.
To some, Friday’s preliminary drop was a sign that prices closer to $90 a barrel may ultimately create more headwinds for crude, said Craig Erlam, analyst at online trading platform OANDA. “It's a big psychological barrier as once that goes, people are just counting down the days until we have triple-figure oil,” he said.
Sunil Kumar Dixit of skcharting.com noted that US crude’s West Texas Intermediate had broken through the multi-year high of $85.40 and tested $87, a peak not seen since November 2014, before profit-booking by retail traders for a weekly settlement of $85.14.
“We may see some cooling off in the heated momentum and price correction towards $82, and the extended correction may reach the horizontal support areas of $80 and $78 and the weekly middle Bollinger Band of $76.50,” said Dixit.
Even so, continued strength and consolidation above $85.50 could prompt WTI to retest $87, extending gains toward $89 and the much-awaited $90 psychological handle, he said.
Many longs held the second view and were happy to press ahead with the oil rally, citing Ukraine as a factor as well.
Oil: Ukraine And OPEC Prop Woes Vs. Weakening US Demand
Oil is holding up “due to geopolitical risk between Russia and Ukraine as well as in the Middle East, while OPEC+ continued to fail to reach its output target," Kazuhiko Saito, chief analyst at Fujitomi Securities Co Ltd, was quoted as saying by Reuters on Monday at the start of oil’s Asian trading.
Fuelling fears of supply disruption in Eastern Europe, on Sunday the United States ordered the departure of family members of staff at its embassy in Ukraine, citing the continuing threat of military action from Russia. The New York Times also reported late Sunday that US President Joseph Biden was considering deploying several thousand US troops to NATO allies in Eastern Europe and the Baltics.
Heightening the drama over Ukraine, a senior British government minister warned on Sunday that Russia will face severe economic sanctions if it installs a puppet regime in Ukraine, as London accused the Kremlin of seeking to place a pro-Russian leader in power there.
The Middle East wasn’t short of tensions either, with the United Arab Emirates reporting that it had destroyed two Houthi ballistic missiles targeting the Gulf oil producing country.
Geopolitical tensions, especially those involving Gulf oil producers and major consuming regions such as Europe, have always pushed oil prices higher.
But oil’s run-up this year also comes amid worsening US fundamentals.
US gasoline stocks rose almost 6 million barrels last week and ballooned by a record 24 million barrels over a three-week period amid seasonally-weak demand that contrasts with the rally in global oil prices, data from the Energy Information Administration showed Thursday.
The data suggests that demand for gasoline, America’s preeminent fuel product, has cratered since the end of holiday 2021 travels.
US refiners also appear to be turning a surfeit of crude into gasoline while the Omicron variant of the coronavirus was reducing some of the regular driving, work-commuting and other activities that required fuels.
US crude oil itself saw a stockpile rise for the first time in eight weeks, rising 515,000 barrels last week, after a 4.55 million decline the previous week. Crude stockpiles are down by just around 6 million barrels over the past three weeks, explaining only partly the current balance of gasoline in the market.
US inventories of oil distillates, which are refined into diesel for trucks, buses, trains and ships as well as fuel for jets, meanwhile fell by 1.431 million barrels last week after an increase of 2.54 million the previous week.
Oil longs are looking past the US data and at the apparent inability of oil producers within the 23-nation OPEC+ to pump crude according to targets set by the alliance. The Saudi-led and Russia-steered OPEC+ agreed to add 400,000 additional daily barrels to output from February but appears to be struggling to reach even quotas marked in earlier months due to underinvestments in new capacity, reports showed.
Gold Adds A Little Pre-Fed Shine
Gold, meanwhile, is adding a little more shine ahead of the Fed’s January policymaking meeting which begins Tuesday and concludes with Wednesday’s news conference by Chairman Jerome Powell.
The central bank is expected to give an update on whether it will indeed finish rolling back its pandemic-era stimulus by March and announce its first rate hike in two months. If so, expectations are that the Fed will hike rates as many as three times this year, with a 25-basis point increase each round. US rates have been held at virtually zero since the COVID-19 outbreak of March 2020.
“Rising levels of inflation are squeezing households and at the same time increase pressure on major central banks to raise interest rates more aggressively,” said Fawad Razaqzada, analyst at ThinkMarkets.
“The net result would be decreased economic activity, which is why we have seen certain sectors of the stock market perform so poorly this year” and inflation assets like gold rally, he added.
Gold futures on New York’s COMEX traded $1,837 an ounce at the time of writing, up a modest 0.5% on the year.
Razaqzada said it remained to be seen whether the latest breakout by gold could be sustained, although “now there are more compelling reasons why the bulls might hold their ground.”
“Key support is now the area between $1,828 and $1,830, which was previously acting as resistance,” he said.
“Short-term resistance is seen around $1,845, but given the big breakout we may see that level break.”
Dixit of SK Charting, meanwhile, said gold longs had three resistance points—$1,860, $1,880 and $1,899—to clear in their quest to reach $1,900, a level the yellow metal hasn’t touched since May.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.