Gold, oil up by 1% as US Fed interest rate decision draws near

Oil prices climbed in Asian trade on Tuesday, extending gains from the previous session, buoyed by expectations of strong fuel demand from the US during the summer, ahead of an output policy decision from OPEC+ at a June 2 meeting.

July Brent crude rose 21 cents to $83.31 a barrel by 0329 GMT. The more-active August futures rose 21 cents to $83.09.

US West Texas Intermediate (WTI) crude futures for July CLc1 were at $78.90 a barrel, up $1.18, or 1.52 per cent, from Friday’s close, having traded through a US holiday to mark Memorial Day without a settlement.

Oil demand outlook

Oil prices rose over 1 per cent on Monday in muted trade owing to public holidays in the UK and the US after a downbeat week characterised by the outlook for US interest rates in the face of sticky inflation.

Expectations of strong fuel demand with the start of the US summer driving and vacation season provided price support, some analysts said.

Despite the general view that higher-for-longer interest rates could result in weak oil demand growth, “real-time mobility data indicates oil demand growth is still broadly healthy,” said UBS analyst Giovanni Staunovo in a client note.

On the air travel front, US seat numbers on domestic flights for May rose by 5 per cent month on month and almost 6 per cent year on year to slightly above 90 million, data from flight analytics firm OAG showed, surpassing 2019 levels.

International flight seat numbers for May rose by 11 per cent year on year to around 14.2 million, with the levels also 8 per cent higher than the same period in 2019, the data added.

Meanwhile, all eyes will also be on the upcoming online meeting of the OPEC+ on June 2, where traders and analysts are expecting production cuts to stay in place and buoy prices further.

“We expect oil prices to move higher in the coming days due to anticipated continued voluntary output cuts by oil producers and growing prospects for easing of US monetary policy,” said Satoru Yoshida, a commodity analyst with Rakuten Securities.

Gold prices up

Gold prices jumped 1 per cent on Monday after a two-week low hit in the previous session as investors assessed diminishing bets of US interest rate cuts ahead of a key inflation report due later in the week.

Spot gold XAU= was up about 1 per cent to $2,355.60 per ounce as of 10:05 a.m. ET (1405 GMT), having touched its lowest since May 9 at $2,325.19 on Friday.

Most of the markets in the US are closed for the Memorial Day federal holiday.

Bullion hit a record high of $2,449.89 last week, but has shed more than $100 since then.

“Gold has suffered from more hawkish perceived comments from Fed officials and better-than-expected U.S. economic data, with market participants again shifting back the timing of the first Fed rate cut,” UBS analyst Giovanni Staunovo said.

Federal Reserve officials indicated that it would likely take longer than previously anticipated for inflation to fall to 2 per cent, the minutes of its latest policy meeting showed last week.

Fed Governor Christopher Waller said on Friday it’s possible that a key underlying interest rate that influences the potency of monetary policy may rise in the future after years of declines, but it’s too soon to say if that will happen.

While gold is often considered a safeguard against inflation, higher rates increase the opportunity cost of holding the non-yielding asset.

Investors are now waiting for the April reading on the personal consumption expenditures (PCE) price index, the U.S. central bank’s preferred inflation gauge, which is due on Friday.

Traders are currently pricing in a roughly 62 per cent chance that the Fed will cut rates in November, according to the CME FedWatch tool, compared to about a 63 per cent chance on Friday.

“We expect gold prices to stay volatile, and price setbacks to be shallow, targeting gold prices to test new record highs later this year,” UBS’ Staunovo said.

Read: Gold hits record peak as investors anticipate US Fed rate cut