French election, OPEC and Trump: commodity trends for May

May 7, 2017 5:27 pm

Marine Le Pen, French National Front (FN) political party candidate, exits a polling booth in the second round of 2017 French presidential election at a polling station in Henin-Beaumont, France, May 7, 2017. REUTERS/Pascal Rossignol

Could the value of Gold begin to give away its gains in the month of May? That is what is currently on my mind when it comes to the precious metal as we approach the turning point towards concluding the first half of 2017!

After rallying heavily in recent months as a result of a mixture of different factors, including an escalation in geo-political tensions and as investors continue to monitor the recent run of political elections throughout the developed world I see downside risks for precious metals and an opportunity for traders to take some profits on Gold after the metal rallied close to $150 since the opening trading day of the year.

One contributing factor behind why I believe that Gold will come under selling pressure this month is linked to a cooling of anxiety across the financial markets in the run up to the French Elections. While Marine Le Pen was previously thought to be a dark horse contender in the race to be declared victorious in the French Election, the shift in popularity towards business-friendly candidate Emmanuel Macron has encouraged a renewed appetite from investors towards riskier assets. When there is increased risk appetite from investors there is a trend where stock markets get provided with a push higher in value and thus, assets like Gold come under pressure.

Another reason why I am bearish on Gold for the time being is due to the likelihood that investor attention will shift back to monetary policy in the United States. The Federal Reserve will continue outlining to investors that the central bank remains on course to raise US interest rates on two more occasions before the year concludes with a US interest rate increase in June emerging into a live possibility. This is something that has not yet been fully priced into the financial markets as it currently stands, meaning that when investors begin to allocate this into their portfolios there will be even more encouragement to reload Dollar positions and consequently remove some of the shine away from Gold.

Where do I currently stand when it comes to Gold? I am bearish on Gold over the short-term and see the opportunity for investors to take profits on recent gains but still remain bullish over the long run.

Why maintain a longer-term bias towards a stronger price in the precious metal? Many questions remain unanswered when it comes to President Trump and if his proposed tax reforms hit a wall down the line as a result of hesitance from Congress to support a proposal that will push the already high US deficit through the roof, stretched stock markets will be at risk and this is where we can search for opportunities for investors to seek the safe-haven appeal of Gold.

In my view, Gold remains one of the best assets for wealth protection and will still be the instrument of choice from investors in uncertain times. The uncertain times that are regularly being highlighted throughout the headlines shouldn’t necessarily just be correlated to the Trump administration either, UK Prime Minister Theresa May has only just invoked the Article 50 document to officially inform the European Union that the United Kingdom wants to leave and the EU are highly unlikely to provide the UK with special treatment, which is something that will encourage uncertainty and dominate attention over the future.

Oil

The constant tug of war between buying and selling momentum in the oil markets that has dictated the run of play for the commodity throughout the opening four months of 2017 is unlikely to change in the month of May.

It could even be said that sellers will look to regain some momentum of the market this month after buyers rushed early in April to price in the news around US President Donald Trump ordering airstrikes in Syria, which was used by some investors as an excuse to purchase Oil. You see the unexpected airstrikes by the United States never really changed the style of play towards how investors have been playing the oil markets and the commodity remains plagued by the same constant oversupply concerns lingering in the background, as it has done for the past two and a half years.

The real name of the game when it comes to oil and what I believe traders should be focusing firm attention towards is the fight between Shale and OPEC.  While OPEC and Non-OPEC members who agreed to cut production late last year in an effort to reduce some of the oversupply pressure dominating the atmosphere also managed to encourage some improved stability when it comes to the valuation of Oil, this has been overturned and used as encouragement by Shale producers to turn the taps back on when it comes to their own production!

US shale output has risen much quicker than originally forecast, with an increase of 123,000bpd expected for May alone. When you also factor into consideration that we have encountered a consistent build up in shale production in previous months, the possibility becomes significant that the return of an oversupply glut will weaken the price of oil as shale floods the market. This is primarily why the scales are likely to be tipped back in the favour of sellers in May, compared to the bullish momentum seen in April.

What does this mean to traders? Attention will shift back towards OPEC and pressure will be intense for the committee, and their non-member allies to return in an effort to regain market share. Traders should set the date May 25 in their calendar because this is when the group are next set to meet in Vienna!

As always investors should prepare for the unexpected when it comes to OPEC meetings with recent history in mind that there have been unexpected surprises from past meetings. With that in mind there are at least two possible risk scenarios that investors should consider in the lead up to the May 25 event:

* While the organisation is currently committed to reducing output, that agreement expires next month. With the markets believing that the current collaboration will need to be extended, there is a risk that the markets will be caught off-guard with a decision to delay this in order to prevent further US shale production from reaching the landscape. Should OPEC and Non-OPEC agree to an increase in production for the second half of the year, a volume war could be on the cards with this providing sellers with heavy encouragement to begin pricing in the resumption of heavy selling momentum in the price of oil.

* The other risk scenario that investors would be mindful to factor into consideration is that there is an agreement to throw in the towel and submit to extending not only the duration of the current agreement, but also cutting further output. Although this would be seen as OPEC declaring Shale victorious in the production war and would also further weaken the credibility of oil producers who until just a few years ago were in full control of global oil production, it would most probably achieve a stronger rebound in the price of oil.

Basically what this could come down to is whether OPEC and Non-OPEC members are willing to lose face by accepting defeat to shale in return for a further boost in revenue, or are they committed to prolong their participation in this ongoing production war with Shale?

The second scenario might sound like an unlikely chance at this stage, but it would impact the Middle East when you consider that multiple Middle East oil fields have been at a standstill since production was curbed and an increase in production activity would be required to resume projects.

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Chief Market Strategist for the Gulf and Middle East region at FXTM, and host of the popular evening business show on CNBC Arabia, Bursat  
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