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Major price dislocations in gold and oil: what do these markets have in common?

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(Kitco News) Gold and oil have something in common — they are both not going anywhere for now but for very different reasons, according to INTL FCStone, which takes an in-depth view at some major price dislocations in both markets.

Oil has seen a significant price collapse in the past couple of weeks, while gold has continued to puzzle analysts with wide spreads between spot and futures prices.

The two markets are very different but might have the same fate, for now, said Rhona O'Connell, INTL FCStone's head of market analysis for EMEA and Asia regions and Kevin Solomon, energy and economics analyst for EMEA and Asia regions. 

"What do gold and oil currently have in common, with respect to their hefty internal dislocations? Lack of transport, essentially, which has been disrupting gold supplies and having a calamitous e?ect on oil demand,' O'Connell and Solomon wrote on Monday. "These two behemoths of the commodities world are facing di?erent issues that have similar outcomes, at least in part."

While the gold market is seeing price differentials between spot and futures, the oil market is seeing a widening pricing divergence between different subsections of the same commodity — Brent and WTI.

"Gold pricing is all over the place across the globe because of logistical issues and varying demand appetites, while oil is experiencing two sets of fractures—one due to the differing geographical demand structures between WTI and Brent and the other due to a subtle but important difference on the supply side between those two sub-sectors," O'Connell and Solomon said in a report.

For gold, the report described the problem as "false tightness," citing air travel restrictions, temporary closure of refineries and some mining closures.

"While oil's risk of a sustained period of oversupply, which led to the massive contangos as the May contract expired, gold's dramatic contango on the expiry of the April contract, and on occasions since has been for the reverse reason, i.e., technical tightness which has been brought about by the lack of transport," the authors of the report said.

Right now, the gold market is back "somewhere between 50% and 60% capacity in terms of logistics," according to the report. "The situation has eased, but it does vary according to each country's state of lockdown." 

For oil, it all came down to storage once demand dropped amid all the lockdowns and Brent was in a better position to handle it, O'Connell and Solomon wrote.

"The spread of the virus has disrupted everything. Quite apart from the humanitarian tragedy, the impact on the world's supply chains has been substantial, to put it mildly with oil taking the majority of the headlines as storage space has come under intense pressure; prices have tumbled and WTI famously went into negative territory on Monday 20th April as long position holders on NYMEX were scrambling to roll out of the May contract (last day of which was the Tuesday) and into forward months in order to avoid having to take delivery," the report stated

Even though Brent also saw pressure, it was nothing like the WTI collapse, O'Connell and Solomon said. "This is because Brent's storage is largely seaborne and it does not have a pinch point such as Cushing. We should not discount the possibility, though, of increased shipping / ?oating storage costs hitting those involved in the Brent market as well as WTI as capacity becomes sought after once more."

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