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WTI Gains Over $2.50 Amid Post-Fed Risk-on Flows and Bullish Inventory Data, Copper Rallies 2.4%

By:
Joel Frank
Published: Jul 27, 2022, 21:39 UTC

Commodities gained across the board on Wednesday, aided by risk-on flows and buck weakness after the Fed interest rate announcement.

Oil fields

In this article:

Key Points

  • WTI rallied over $2.50 on Wednesday amid post-Fed risk-on flows and after bullish US inventory data.
  • Copper rallied on risk-on flows plus the weaker dollar, but analysts remain skeptical of a rebound.
  • Gold prices rallied as US real yields fell post-Fed, primarily as a result of a spike in US inflation expectations.

Oil Rallies on Bullish Weekly US Inventory Figures

Front-month futures contract prices for WTI, the US benchmark for sweet light crude oil, rallied on Wednesday after the latest official weekly US oil inventory report dispelled fears about US gasoline demand weakness and amid risk-on flows in wake of a dovish 75 bps rate hike from the US Federal Reserve. Post-Fed US dollar weakness also helped support USD-denominated US oil prices. WTI was last trading just above $98 per barrel, slightly more than $2.50 up on the day.

According to the US Energy Information Agency’s latest week inventory report, crude oil stocks dropped by 4.5 million barrels last week, with WTI exports having surged thanks to its growing discount to its European peer Brent. That was much larger than the roughly 1 million barrel expected to draw.

Meanwhile, gasoline inventories dropped by 3.3 million, much larger than the 0.85 million barrel drop that had been expected. According to one analyst at Mizuho, “all talk about demand destruction stopped in its tracks (with) this report… the situation has changed dramatically in two weeks”. Concerns about weakening demand for US gasoline had weighed heavily on crude oil prices last week.

Oil traders noted that WTI remains stuck within a bearish trend channel that has been in play since mid-June, though it is once again testing the upper bounds of this trend channel, having found support at its 200-Day Moving Average near $95 once again earlier in the session.

Worries about the global oil demand outlook amid recent softening of global economic activity has been the main factor weighing on crude prices in recent weeks. With things likely to get worse for the US and global economy before they can get better, and with the threat of lockdowns still there in China, analysts suspect the worst for oil prices may yet be to come.

Elsewhere in energy, US natural gas prices continued their reversal back from their near-annual high levels hit on Tuesday. Spot prices were last around $8.66, down roughly 1.5% on Wednesday and down about 9.0% from Tuesday’s highs around $9.50, though still up about 60% versus early July lows.

Copper, Gold Rally on Dovish-Fed Induced Buck Weakness

USD weakness in wake of the Fed’s latest not as hawkish as feared policy announcement, where it lifted interest rates by 75 bps as expected, has supported both copper and gold prices on Wednesday. Copper, which as a risk-sensitive asset, also derived a boost from risk-on flows that supported strong gains on Wall Street, was last changing hands at just under $3.50, up nearly 2.5% on the day and now up over 10% versus earlier monthly lows.

Prior to Wednesday, copper prices have been supported by 1) data showing a heating up of economic activity in China and 2) government announcements of new money to support infrastructure development and the country’s property sector. But analysts remain reluctant to bet on a lasting economic rebound amid the ongoing threat of further Covid-19 lockdowns. Such concerns, combined with worries about weakening global growth, are keeping many analysts bearish on copper’s near-term prospects.

Spot gold prices, meanwhile, were last up about 1.0% after hitting fresh weekly highs in the $1,730s, though prices did find resistance at their 21DMA just above $1,740. Gold was also supported by a sharp post-Fed drop in US real yields that was primarily driven by a rise in inflation expectations, which is itself perhaps a reflection of some modest concerns that a Fed that is becoming more concerned about growth may be less able to get inflation back to target beyond 2023.

About the Author

Joel Frank is an economics graduate from the University of Birmingham and has worked as a full-time financial market analyst since 2018. Joel specialises in the coverage of FX, equity, bond, commodity and crypto markets from both a fundamental and technical perspective.

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