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Thursday, September 28, 2023

Energy & Precious Metals – Weekly Review and Outlook

Energy & Precious Metals - Weekly Review and Outlook
© Reuters

By Barani Krishnan

Investing.com — Is OPEC the Pied Piper of the oil market?

Playing the we-aren’t-troubled-yet-by-Omicron tune, the oil cartel and its allies blew an air of tranquility this week – even festivity, one might argue, for longs in the market – as the world huffed and puffed over the calamity that might come from the Covid variant. 

The “tune” from the OPEC+ alliance was that come January, there will be no change to its output. Decoded, it meant demand for crude will be rock-steady at the start of the new year despite the gloom of a supply surplus envisaged in the cartel’s own internal research for the coming quarter.

The longs in oil – making up for the original rats or children in the medieval-era tale in Hamelin – sucked up what OPEC+ played and sent crude prices higher after the alliance’s meeting on Thursday.

Of course, by Friday, part of the optimism blown by the cartel and its allies into oil drowned with equity markets capsizing from a cocktail of negative vibes that came from a mixed U.S. jobs reports for November, fears of a Fed rate hike that could occur in three months and – yes – more Omicron cases reported across America.

That, however, did not obfuscate what OPEC wanted oil traders to hear or believe in – that demand for crude will be higher, not lower, in the coming months and that it was keeping to the 400,000 additional barrels per day it had pledged to pump since July. The underlying message was: “Don’t short the market. Go long.”

If one were to consider the mixed messaging in oil supply-demand forecasts over the past few weeks, it’s hard to be either long or short.

In its closely-watched monthly report released on Nov 16, the International Energy Agency, which looks after the interests of consuming nations, said the “tight market” in oil was about to ease. The IEA said it expected output to rise by 1.5 million barrels a day in the remainder of 2021, with the United States, Saudi Arabia and Russia accounting for around half of that amount.

And while demand for transportation fuels continue to recover and a supply shortage in the natural gas market has forced some power plants to switch to using oil and refined products, “new Covid waves in Europe, weaker industrial activity and higher oil prices will temper gains,” the Paris-based energy watchdog said.

All that, interestingly, was before the emergence of the Omicron strain.

OPEC+ itself has forecast a global oil surplus of 2 million barrels per day in January, 3.4 million in February and 3.8 million in March, according to a Reuters report of an internal document prepared by the alliance ahead of its meeting this week. That forecast ostensibly includes the additional barrels of petroleum reserves the United States and other major consuming countries will be selling over the next few months. 

Despite this, the bigwigs in OPEC+ – Saudi Arabia and Russia – decided at their Thursday meeting to stick to what they were pumping. Their chutzpah over how strong the market will be in the coming quarter was as infectious as a Covid strain, helping crude prices rebound forcefully from Wednesday’s four-month lows.

But as that feel-good momentum faded by the weekend, OPEC was back threatening traders with production cuts.

“We will continue to do what we know best to ensure we attain stability in the oil market on a sustainable basis,” Secretary-General Mohammad Barkindo told an industry event on Saturday.

Stripped of its gloss, it meant that the 400k in daily barrels the alliance had pledged since July might be the first to go if demand and prices don’t come its way by January. Beyond that, it could do deeper cuts. Don’t forget that the Saudis and their allies are still withholding some 5.0 million barrels of regular daily supply from the market as part of production cuts carried out at the height of the Covid-19 price cuts. It has no qualms adding to that.

To be sure, OPEC worries about oil market stability and sustainability only when crude prices are going down, not up. Barkindo had uttered those choice phrases to death during each oil bust that occured in his five years at the helm of OPEC. But when the market jumped a whopping 20% between August and October, he was smiling ear-to-ear instead.

OPEC may have steadied the crude ship for now. But Omicron as a threat is just beginning. Since the first U.S. case reported on Nov. 30, a total of at least 20 have  been detected across 12 of America’s 50 states. Dozens of countries worldwide have also reported infections from the variant. Fasten your seat belts, folks; the roller-coaster ride for oil has started. 

Oil Market Activity & Price Roundup

U.S. oil prices fell back on Friday, posting a sixth straight weekly loss, despite OPEC signaling that it was ready to pull back on production at any time if fears over the Omicron continued to hurt demand for energy.

After closing lower for five days in six, crude prices rose on Thursday and remained higher for most of Friday. But at settlement, WTI, or the West Texas Intermediate benchmark for U.S. crude, fell while Brent, the London-traded global gauge for oil, managed to eke out a gain.

Analysts had read the initial bounce back as a sign of the market’s confidence in OPEC+’s decision to leave its output unchanged for now, with a caveat for change should demand collapse going into the first quarter 2022.

“Whatever initial comfort the market took with the OPEC decision seems to have evaporated and now there are fears again that this thing is going to come back and bite us in the rear,” said John Kilduff, founding partner of Again Capital, an energy hedge fund in New York.

The Omicron saga appears to have turned the 2021 oil rally on its head, bringing to a halt the surge in crude prices many thought were headed to $100 a barrel, or minimum of $90, by the year end. Notwithstanding the price reversal of the past six weeks, WTI remains up 36% for the year while Brent shows a 35% gain.

Since health authorities announced the first U.S. case of the Omicron in California on Wednesday, there have been at least eight more infections reported, five of them in New York City – an early epicenter of Covid-19 in 2020.

New York City Health Commissioner Dave Chokshi said the cases in the city indicated a community spread of the Omicron, independent of infections that had directly occurred from travel to South Africa, where the strain was first detected.

“This is not just people who are traveling to southern Africa or to other parts of the world where Omicron has already been identified,” Chokshi said.

At Friday’s settlement, the front-month January contract in West Texas Intermediate, the U.S. crude benchmark, settled down 24 cents, or 0.4%, at $66.26 per barrel. For the week, WTI was down 2.8%. It was also off 20% for the past six weeks combined, after hitting a seven-year high of $85.41 during the week ended Oct. 15.

London-traded Brent crude, the global benchmark for oil, settled up 21 cents, or 0.3%, at $69.88 on its most-active February contract. Brent was down 4% for the week though, and off 18% for the past six weeks combined, after hitting a 2014 high of $86.70 during the week to mid-October.

WTI Technicals

Investing.com’s regular contributor for commodity technicals, Sunil Kumar Dixit of skcharting.com, presents this:

WTI continued with a bearish streak for the 6th week in a row, testing a low of $62.40 and settled at $66.25, critically below the 50-week Exponential Moving Average of $67.07.

Going forward, WTI price action suggests that it has approached strong support areas and extended selling can push it to the 200-week Simple Moving Average of $56.90 and the 100-week SMA of $52.90.

Since WTI’s primary trend is bullish, corrections of $62-$57 is also a strong confluence area on the monthly chart that will attract value buying, triggering fresh moves up.

Gold Market Activity & Price Roundup

“Every crisis has its silver lining.” Or so, the saying goes.

And in gold’s favor is Covid’s Omicron variant and the crisis of confidence it has spawned in the global recovery from the pandemic.

Expectations had been heavy all week for gold to collapse into the $1,600 territory after Federal Reserve Chair Jerome Powell announced his willingness for the central bank to speed up the taper of its pandemic-era stimulus, and have a U.S. rate hike faster than originally thought.

But fears about the Omicron’s potential impact on the United States and the world proved bigger in the end, triggering safe-haven buying in gold. That helped the yellow metal’s prices to hover in the high $1,700s and post a gain at the close of Friday’s futures trade in New York.

U.S. gold futures’ most active contract, February, settled Friday’s trade up $21.20, or 1.2%, at $1,783.90 an ounce. For the week, it lost a tiny 0.2%.

Gold’s relative strength also came on the back of the collapse of U.S. 10-year Treasury note note, which fell more than 6% on Friday, though the Dollar Index remained strong all week.

“It’s odd but gold didn’t melt down on the Fed’s threat for a quick taper or rate hike, and instead coasted on the bigger worry associated with the Omicron,” said Phillip Streible, precious metals strategist at Blueline Futures in Chicago. “Talk about a crisis in need.”

To buttress the gold story, the International Monetary Fund even said the Omicron variant was likely to reinforce the IMF’s decision to downgrade global growth forecasts it made in October – a decision already in the works since the protracted impact of the Delta variant of Covid.

Gold Technicals

Skcharting’s Dixit says: Gold spent the week trading with a bearish bias, extending its correction to $1,761 and settling at $1,783, well above the 61.8% Fibonacci retracement level at $1,768.

Daily and weekly closes above $1,768 can be seen as a gesture for some short-term recovery from the lows, reaching $1,795 initially. But a trade through $1,810 is needed to retest the most recent peak of $1,825.

Failure to hold above $1,780 may extend weakness to $1,750 and $1,735.

Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.


Source: Investing.com

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