Cheap Oil, low yields

Monday morning’s rebound in US bond yields didn’t last long; the US sovereign bond yields fell as rapidly as they rose on Monday as a $55bn auction of 5-year US bonds saw strong demand after a weak sale of 2-year bond. The US 5-year bond yield returned to 4.40%, the US 10-year yield also snapped back to 4.40% after an attempt past the 4.50% level earlier, the 2-year yield was under pressure and retreated to 4.87%. 

The Fed expectations remain soft and sweet, the falling yields further weigh on the US dollar. The US dollar index is now testing the 103 support to the downside and has given away more than half of gains it recorded between July and October. And the combination of falling long-term yields and cheaper dollar continues to push the price of an ounce of gold higher. This morning, the precious metal trades just shy of the $2020 level. Yet, the upside potential is limited as the US bond rally will likely leave its place to consolidation and correction, the Middle East tensions have been softer over the past few days, and gold is about to step into the overbought territory, while the price of an ounce is at a spitting distance of the ATH of around $2080 per ounce.  

Cheaper Oil, lower yields 

A deeper fall in oil prices could support a further bond rally. There is a positive correlation between crude oil prices and US 10-year yield. The cheaper the oil, the lower the US 10-year yield, because cheaper oil tames inflation expectations and softens Fed expectations. And oil prices could decline further if OPEC+ fails to deliver a substantial supply cut at their meeting this week. Saudi is reportedly asking other cartel members to reduce their supply to have a powerful impact on oil prices, as it looks clear as the daylight that another 1mbpd cut from Saudi alone won’t even suffice to stabilize prices. The barrel of US crude is down for the 5th consecutive day, it remains offered into the $75pb this morning. Both bulls and bears are waiting in ambush to buy, or to sell, in reaction to what solution OPEC+ will come out this week.  

Gasoline prices in the US gasoline prices are down for the 60th straight day. It is good news for the Fed’s inflation battle. It is even better news for Joe Biden’s election campaign.

And there's another noteworthy point: The process of replenishing the US emergency oil reserve is facing delays due to companies holding back on returning the borrowed oil. Shell, Chevron, and TotalEnergies, among nine firms participating in a government oil exchange program over the past two years, were slated to return the oil this year and the next. However, these three companies received approval from the US government to defer the return of approximately 5 million barrels until 2024 and 2025. This indicates that there is no urgency on the part of the US government to replenish these reserves before the upcoming US elections. Full stop.