Global oil prices fell in European trade on Tuesday for the first time in four sessions off three-week highs on active profit-taking. 

Losses are stymied by growing tensions in the Middle East which threaten to disrupt global supplies, while hopes grow for stronger fuel demand in China.

Prices Today 

US crude fell 0.75% to $77.55 a barrel, while Brent slipped 0.7% to $82.74, with a session-high at $83.60. 

US crude rose 0.1% on Monday, the third profitt in a row, while Brent added 0.2%, approaching three-week highs at $83.63.  

Red Sea Tensions 

Geopolitical tensions in the Middle East continue to grow, as Israel continues to launch strikes against Hamas militants in Rafah, while western nations, led by the US, are calling for a ceasefire. 

A UK-registered cargo ship reported a new attack from Yemen’s coasts on Sunday, with the crew leaving the ship after an explosion. 

The Iran-backed Houthi group said it won’t stop escalating conditions in the Red Sea until the Israel war with the Gaza strip is over.

Chinese Demand 

Many analysts expect fuel demand to rebound in China as economic activities resume in full following the New Lunar Year holiday. 

Chinese authorities recently took fresh stimulus measures to support struggling growth, which is expected to reflect on fuel demand. 

The People’s Bank of China cut the reference interest rates for real estate loans by more than expected on Tuesday in an attempt to buoy the struggling sector. 

According to latest estimates by the Citibank group, analysts say it’s possible for gold prices to hit $3000 an ounce, and for oil prices to hit $100 in the next 12 to 18 months.

The strategic team for the group put three possible catalysts that could materialize these forecasts by 2025. 

The major catalysts for a gold surge would be an increase in gold holdings by global central banks, or an inflationary recession, or if a deep depression hit the global economy.

Central Banks Purchases 

Citibank analysts said in their memo, that the most likely path towards $3000 would be a massive surge in gold purchases by central banks, especially in developing economies as a potential trust crisis around the dollar grows. 

Such purchases already scaled record highs in recent years as central banks seek to reduce credit risks and diversify holdings, especially in China, Russia, India, Turkey, and Brazil. 

The International Gold Council reported that net gold purchases by global central banks surpassed 1000 tonnes for two consecutive years.  

If such purchases increased to 2000 tonnes, it would provide a massive boost to gold prices.

Inflationary Recession 

An inflationary recession leads to higher prices and slower growth and higher unemployment, boosting demand for gold as a safe haven.

Citigroup analysts believe that such a scenario is very unlikely, but remains possible.

Global Depression 

The most important scenario which could push gold prices to $3000 would be a global economic depression that would force central banks, led by the US Federal Reserve, to cut interest rates. 

That means cuts to below 1%, which could push gold prices to $3000, however it’s an unlikely scenario. 

Aside from these scenarios, Citigroup’s main forecasts for gold prices remain at $2,150 an ounce through the second half of 2024. 

Oil’s Path to $100 a Barrel 

On oil, Citigroup analysts said oil prices could hit triple digits once more if geopolitical risks surged, or if OPEC + enacted deeper cuts, or if supply disruptions occurred. 

The ongoing Israel-Hamas war in Gaza hasn’t really impacted oil production or exports, with the sole influence coming from the Yemeni Houthi group attacking ships, including oil tankers in the path through the Red Sea. 

The report said that Iraq, a major oil producer, is impacted by the conflict, and any escalation could hurt other major OPEC+ producers in the region. 

The Citigroup report also warned of potential supply disruptions from Iran, Libya, Nigeria, Venezuela, and others, especially if the US enacted more stringent sanctions on Iran and Venezuela. 

Other geopolitical risks would develop if Ukraine managed to attack Russian oil refineries with drones. 

Sterling fell in European trade on Tuesday against a basket of major rivals, extending losses for the second straight session against the dollar on expectations that the Bank of England might cut interest rates sooner than the Federal Reserve. 

Now investors await a Parliamentary hearing for Bank of England officials later today on monetary policies to gather more clues about the future. 

GBP/USD

GBP/USD fell 0.2% to 1.2579, with a session-high at 1.2598, after closing down 0.1% on Monday, the first loss in three days on thin trading. 

UK Rates

Recent UK inflation and growth data is raising the odds for an early UK interest rate cut in May.

Markets are now expecting a 15% chance of a UK interest rate cut in March, and a 50% chance for such a cut in May. 

Overall, traders now expect 71 basis points of total UK rate cuts in 2024, down from 134 basis points in previous forecasts.

Hearing Session

As of 10:15 GMT, the UK Parliament will hold a monetary policy hearing session with Bank of England policymakers, which could provide clues on the future path of policies. 

The BOE said following its last policy meeting, that it expects consumer prices to hit the 2% target in the second quarter of 2024 before rising once more in the third and fourth quarters. 

BOE Governor Andrew Bailey said that it won’t be “mission accomplished” if inflation returned to 2% in April, as pressures from services prices are still ongoing. 

He asserted the need to see more evidence of the slowdown of consumer prices towards the 2% target before cutting interest rates. 

Yen declined in Asian trade on Tuesday against a basket of major rivals, resuming losses against the dollar and trading below 150 yen per dollar once more as US treasury yields rally.

The gains came despite statements by Japan’s financial minister on monitoring the currency’s forex movements and preparing for intervention to support it if needed. 

USD/JPY

USD/JPY rose 0.15% to 150.37, with a session-low at 150.07, after the yen rose 0.1% yesterday against the dollar away from a three-month trough at 150.88.

US Treasury Yields 

US 10-year treasury yields rose by over 0.8 basis points today, maintaining gains for another session and underpinning the greenback. 

The developments come following a spate of strong US data and bullish remarks by Fed officials this month. 

The data and remarks hurt the odds of early US interest rate cuts in March and May, and bolstered the conviction that June will likely be the date of the first Fed rate cut. 

Higher US yields pressure the yen against the dollar, as the yield gap between Japanese and US bonds widens.  

Japan’s Financial Minister 

Japan’s financial minister Shinuchi Suzuki said on Tuesday that authorities are closely monitoring yen’s movements in the forex market and will intervene to support the local currency if needed.