How OPEC/OPEC+ will react to current prices at the June meeting will become the hot topic as the month of May begins to drain away. One wonders how much wiggle room there can be in tightening supply bearing mind it was at this juncture in the year that many commentators and some OPEC members were musing as the time that some shuttered supply might be brought back to the market. A lot can happen in ten days, especially in these itchy trigger-finger climes, but at present the current affairs surrounding oil prices could not tolerate re-instated crude supply from the cartel. Yes, Iraq was quick to correct its Freudian slip when it intimated that it had suffered enough under production cuts, but one wonders if the collective mask slipped would there be similar feelings from other OPEC members? Deploying a cynical look is justified in observing that if another increase in voluntary cuts could actually get through a vote, it might just encourage (more?) cheating.

Holding OPEC’s hands to the fire in particular are the state of refined products. Ukraine might just be sharing in some of the cartel’s disappointment as despite the many drone attacks on Russian refineries, with the latest one only two days ago, the current Russian ban on Gasoline exports has been lifted for one month. With the domestic market described as being ‘saturated’ by the Energy Ministry, the decision to allow exports again was to prevent unwanted stock building at processors. In February, just before the ban, Russia sold abroad about 141,000 barrels a day of gasoline, or almost 14% of its total production of the fuel, according to industry data seen by Bloomberg. Those that have been looking to Gasoline as the great oil hope in the summer just felt a shake in the foundation of their faith, even with the reported cut in Chinese gasoline outflows. Distillates remain in the dog-house as refinery margin continues to perform poorly and has rumours across the wires of run cuts in Asia. Indeed, within China, Reuters calculate that because of a shortfall in uptake in refiner quota there is some 830kbpd surplus of crude which will now find its way to tank. We continue to believe that without a substantive change in the fortunes of refined products, crude prices will continue in a depressed state.

So, what would you buy, Gold or Oil?

One of the biggest catalysts for ownership of gold is the very stubborn inflation that has thus far frustrated Central Banks, particularly the Federal Reserve in being able to cut interest rates. The uncertainty of the progress of this fixation accounts for why many when seeking investment have been turning to gold. There is normally a negative correlation between gold and interest rates, nothing is ever sure-fire, but as interest rates fall traditional investment practices become less attractive as does cash and the appetite for the most tangible of assets increases. Therefore, it could be assumed that the higher interest rates of present day and their effect on the US Dollar, the currency that gold is priced in, ought to have a detrimental influence on its value. Not so.

Each country has a different perspective, but staying with the United States for the moment the current northbound travel in price is at counterculture to what normally happens, and it is mainly to inflation that the root of continued progress is found. Inflation devalues currency and assets and raises prices including that of commodities and gold and is where the original inflation hedge first appeared. The yellow metal always finds a place in the portfolio of Americans. In a recent Gallup poll of the Perceptions of the best Long-Term Investment, gold held 23% of lower income households monies, 19% of middle-incomers and 14% of upper, coming in just under stocks/mutuals/bonds and the ever first placed real estate. Gallup argues that if were not for the recent success of the stock market, gold would be placed second.

In terms of culture, it is a murky assertion that gold trading is completely permissible in the Islamic faith. Scholars disagree on whether gold can only be used as a replacement currency or used in the same fashion as a commodity. All transactions must be in cash at the spot market rate and must not be used for speculative intent. Hard to prove in the current climb in prices if bullion or jewellery is held in any decent amount, but the emphasis is on the word ‘intent’. But most of increased buying is defensive as protection against inflation and world agonies which at present are many. In the Middle East, owning gold is as old as time itself and the secular community are under no religious obligations.

In the Middle East, along with the rest of the world, there is a fear in holding dollar denominative assets because of the use of sanctions. The US might not always be able to bring to fruition restriction on movements of goods in a sanction scenario, but it has much more success due to its power in the use of the dollar. Fearful of this, countries that are not at present exchanging greeting cards with Uncle Sam are using gold to diversify away from their dollar exposures. In 2023, the People’s Bank of China reportedly bought about 225 tons of gold, taking its total reserves up to 2,235 tons, according to the World Gold Council and demand for gold jewellery in India amounted to about 562.3 tonnes.

Why then is there no such tangible asset/inflation hedge buying present in oil prices? The answer is that there is a lot less gold around than there is oil. OPEC+ have done remarkably well in their voluntary cuts in such times of competing adversity especially from the Americas, but what screams against any such move that gold is experiencing is spare capacity. None more than in OPEC, which at last look stood at 6mbpd. That does not apply to world’s favourite default investment. The Wall Street Journal has that if you gathered all the gold ever produced in the world’s history it would be the equivalent of a seven-storey house at about 5,000 square feet, or according to metal analysts about 190,000 tons. According to the World Gold Council, 2023 demand was a record 4,899 tons against annual mine production of 3,644 tons, recycled of 1,237 tons giving a total supply figure of 4898.8 tons. As the data shows, it is about as close to equilibrium as a market can get. But any more demand from Central Banks that are buying against geopolitical stress, individuals that are dumping gold ETFs to buy physical bullion and a younger investment fraternity that are looking beyond just crypto; gold’s balance is about to become short.

© 2024 PVM Oil Associates Ltd