Bart Melek at TD Securities argues that Strait of Hormuz disruptions have driven Oil inventories to historically low levels, leaving Brent oversold and vulnerable to a sharp short-covering rebound. The bank sees Brent potentially moving into a $90–110/bbl range or toward $100/bbl for a period, which would lift inflation expectations and reinforce restrictive Federal Reserve policy, pressuring Gold further.

Inventory erosion and shorts support upside

"With the Strait of Hormuz disruption eroding inventories to historically low levels, the key risk is that the oversold crude market could stage a sharp rebound as specs cover in response to tightening supply conditions. We believe Brent could still move into the $90–110/bbl range, lifting inflation expectations and reinforcing a restrictive policy bias, thereby increasing carry and opportunity costs for gold holders."

"Despite the likelihood that tankers will be able to pass freely through the Strait of Hormuz, the continued erosion of inventories to unsustainably low levels well into October suggests that crude could still move toward $100/bbl territory for a period, up from the current $74/bbl."

"It is also important to note that oil is oversold, with investors holding outsized short positions. With Cushing inventories slightly below 19 million barrels and global inventories also reaching low levels there is a strong possibility of a short-covering rally. Such an upside move would likely push market participants to price in a more restrictive Federal Reserve policy stance."

"There also remains the possibility that China, which in our view has played a key role in preventing a sharper oil price surge at the onset of the crisis and in driving prices lower more recently by reducing imports by 40%, may not be able to continue doing so through October. China is unlikely to draw down its strategic reserves for an extended period, as doing so could leave it vulnerable should new hostilities emerge."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)