Commodities Week Ahead: Oil, Gold to Stay Volatile as Eyes Next on Fed’s Powell

• Impact of January US jobs report still making its way through markets
• Worry about how Fed’s rate-hike consolidation will go weighs on investors
• Oil, gold make nominal advance; Powell’s Tuesday speech awaited

The blockbuster January US jobs report from last week and its potential impact on the Fed’s rate-hike consolidation are still working their way through markets, with further weakness likely this week in oil and gold prices even as the two commodities attempt to rebound from Friday’s hit.

Oil was dragged to three-week lows while gold lost almost $100 an ounce from its highs of the past 48 hours after the US Labor Department reported on Friday that 517,000 jobs were added to non-farm payrolls in January, almost three times more than forecast.

The Dollar Index and yields on the US 10-year Treasury note, which act as contra trades against risk assets that include commodities, stayed in the green on Monday after last week’s late rebound — limiting the gains in oil and gold.

In Monday’s Asian session, New York-traded West Texas Intermediate, or WTI, crude for March delivery was down 12 cents, or 0.2%, to $73.27 per barrel by 04:20 ET (09:20 GMT). It settled down 3.2% on Friday and 7.5% for last week, touching a three-week low of $73.11.

London-traded Brent crude for March delivery was up 2 cents, or 0.04%, to $79.97 per barrel. It fell 2.7% on Friday and 7.5% for the week, hitting a three-week low of $79.62.

Gold for April delivery on New York’s Comex was up $9.05, or 0.5%, to $1,885.65 per ounce. It settled Friday down $53.90, or 2.8%. It hit a one-month low of $1,861.50 during the session.

While recession concerns were mainly responsible for last week’s plunge in oil, with uncertainty over the Fed’s next move also weighing on crude and gold, Monday’s support at the lower level lifted both.

Help for oil also came from an unlikely source that has lately been supportive of crude.

The IEA, or International Energy Agency, reiterated on Sunday its projection from January that China’s recovery from its COVID crisis would be a key driver for oil demand this year. While forecasts by the Paris-based IEA are widely followed across the market, the agency is also routinely accused by oil bulls of having a bearish outlook on crude demand and prices due to the consumer nations it looks out for.

Half of global oil demand growth this year will come from China, where jet fuel demand was surging, IEA executive director Fatih Birol said.

Depending on how strong that recovery is, the global oil alliance OPEC+ may have to reassess its early October decision to cut output by 2 million barrels per day through 2023.

Speaking on the sidelines of a conference in India, Birol told Reuters:

“If demand goes up very strongly, if the Chinese economy rebounds, then there will be a need, in my view, for the OPEC+ countries to look at their (output) policies.”

Despite the IEA’s projections on China, DBS Bank’s lead energy analyst Suvro Sarkar said higher interest rates were keeping a lid on price gains. He adds:

“We are not seeing any big evidence of a China domestic demand rebound yet, though mobility numbers are encouraging. Hence, concerns about central banks’ rate hike cycles and higher for longer interest rates remain the key drag on oil prices after falling more than 7% last week.

It’s not immediately intuitive that good jobs data would cause a crash in oil prices, but such are the vagaries of the market currently.”

Price caps on Russian fuel products, meanwhile, took effect on Sunday, with the Group of Seven, the European Union, and Australia agreeing to limits of $100 per barrel on diesel and other products that trade at a premium to crude and $45 per barrel for products that trade at a discount, such as fuel oil.

ANZ’s analysts said in a client note:

“For the moment, the market expects non-EU countries will increase imports of refined Russian crude, thus creating little disruption to overall supplies. Nevertheless, OPEC’s continued constraint on supply should keep the market tight.”

The 13-member OPEC, or the Organization of the Petroleum Exporting Countries, is led by Saudi Arabia. Together with Russia and nine independent oil-producing countries, the alliance is known as OPEC+.

Saudi Arabia’s energy minister, Abdulaziz bin Salman, reiterated at the weekend a warning the kingdom had been droning on for over a year — that sanctions and underinvestment in the energy sector could result in a global energy crunch.

After Friday’s markets’ jolt from the January jobs numbers that forced investors to recalibrate expectations over how hawkish the Federal Reserve could get to rein in inflation, all eyes will be on a speech due from Fed Chair Jerome Powell on Tuesday.

Last week Powell acknowledged progress in the fight again inflation, but the unexpectedly strong jobs data has potentially given the central bank more leeway to keep hiking rates.

Investors are fearful that the Fed’s aggressive rate hikes will plunge the economy into a recession.

There will be an update on the labor market with Thursday’s initial jobless claims numbers, while several other Fed officials are also scheduled to make appearances, including New York Fed President John Williams, Minneapolis Fed President Neel Kashkari and Atlanta Fed President Raphael Bostic.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.