Rangebound oil but gold still shining

05 June 2020

5 minute read

By Gerald Moser, London UK, Chief Market Strategist

As quarantine measures are eased and sentiment improves, positive supply cut news bodes well for oil. Meanwhile, worrying geopolitical tensions, risks of another round of COVID-19 infections and low interest rates mean that prospects for the yellow metal look encouraging.

The West Texas Intermediate oil price almost doubled in May, continuing its recovery. A combination of deeper than expected supply cuts from oil producers and better than expected demand, notably from China, aided sentiment towards the commodity.

Sharper supply cut and stronger demand …

OPEC+, a group comprising members of the Organization of the Petroleum Exporting Countries (OPEC) and other leading oil producers such as Russia, had agreed to cut their combined output by almost 10m barrels per day (bpd) in May and June. While unprecedented in magnitude, the move only partially compensated for a fall in demand that topped 20m barrels a day at the peak of the crisis in April.

There have been questions around OPEC+’s commitment as previous agreements have been at times only loosely implemented. Saudi Arabia usually compensated for smaller countries producing more than their quota in such circumstances.

But this time is different. It seems that the most important producers within OPEC+ are complying with the cuts, notably Russia. In addition, the three biggest OPEC+ producers (Saudi Arabia, Kuwait and the United Arab Emirates) also announced that they would voluntarily cut by an additional 1.2m bpd. And while the self-imposed restriction was supposed to be eased to 8m bpd starting in July, there are now talks about keeping the current production level for another few months.

…means balanced market soon

Other oil producers outside of OPEC+ have drastically reduced supply to reflect the deteriorating economics of the oil market. The International Energy Agency reports that supply from outside the alliance was already 3m bpd lower than at the start of the year. The latest trend of rigs in operation, suggests that US production has fallen further (see chart).


With the recovery faster than expected in China, and most of Europe emerging from lockdown in the next couple of months, demand will continue to increase. But despite those positive developments, the oil price is unlikely to continue to rise as fast as it did in May, as large inventories still need to be reduced. We expect it to be rangebound in the near term.

Long-term support for gold

Gold has rallied by 15% from the lows reached in March. We continue to see compelling arguments for the gold price to move higher over the next 12 months.

Positive news on the science of fighting the pandemic, such as a successful vaccine or a drug treatment, might trigger weakness in the short-term, as investors flee gold for riskier assets. Encouragingly, this would likely encourage increased demand for jewellery in places like India and China, where demand for gold collapsed in the past three months.

We also believe that geopolitical tensions, risks of a second wave of COVID-19 infections, record balance sheet expansions from major central banks and potentially higher inflation on the horizon all support higher gold prices in the long term.


Market Perspectives June 2020

Financial markets have bounced further from March’s sell-off as more countries ease COVID-19 restrictions. But risks of another bout of COVID-19 infections and geopolitical tensions remain.


We give you versatility and a choice of services

Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This document has been issued by the Investments division at Barclays Private Banking division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.

This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.

Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation..

This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted.  You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.

The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.