Why Oil Drops? | 28 April 2017

The forecast for the week of April 24-28:

XAU/USD:

Gold may show moderate drop on the last week of the month. We believe, there are three reasons for this decline. First of all, reduced inflation expectations are to blame. G-7 10-year Treasury bonds yield, which reflect investors inflation expectations on world's largest economies, at their lows over the last four months. That's a bad signal for gold, as it is used as hedge from inflationary risk.

Second of all, now there are big oil sales, which is not good for gold either, as these two instruments have a strong correlation. Moreover, oil has a great impact on inflation, and dropping barrel price will keep reducing inflation expectations in G-7 states.

Third of all, quarterly US GDP release is scheduled on the last trading day of the week, which may be more positive as expected considering steady rise of ISM Non-Manufacturing and Manufacturing indices. Along with that we may expect greenback strengthening, which is traditionally negative for gold. Trading recommendation: Sell 1280/1300 and take profit 1260.

Brent:

Oil closed the previous week with a strong quotes drop and we believe that decline is to continue this week. The key driver of price dropping is increased oil out put in US. US oil output has increased 11 weeks in a row and we may soon see a new high considering increasing number of oil rigs. Over the last week number of horizontal rigs has increased by 12 units, and number of vertical rigs has increased by 2. When both indicators rise, oil output always rises.

All in all, we will not expect new oil market crisis. We may see low renewal of March 22 (49,91) but it will have a short-term effect. Why? Because OPEC states and Russia have almost agreed to extend oil output reduction agreement for the second half of 2017. Minister of Energy of Saudi Arabia has announces that the cartel hasn't reached inventories reduction goal, so new measures for goal achievement are needed. Trading recommendation: Sell 53,30/54,50 and take profit 51,92.

S&P500:

This week will determine future of American stock market. First of all, 962 quarterly corporate reports are to be published, including reports of such market giants as Alphabet, Coca-Cola, Boeing. Second of all, US GDP report for the first quarter is scheduled on April 28. If investors will be positive about these reports, they will start buying shares actively. Otherwise, we will face sales. Which scenario is more likely to happen? We stick to the first one, as we expect majority of reports to be positive considering good US macroeconomic releases over the first three months of the year. It's worth to also mention that real estate sales are at their highest over the last 10 years, which is a strong indicator of economic health. Considering all this, corporate revenue rise indicates that we may expect a better GDP release as expected. Trading recommendation: Buy 2367/2351 and take profit 2380.