By Barani Krishnan
Investing.com - It was a big week in oil, with West Texas Intermediate crude hitting $65 per barrel and Brent $75 before falling back sharply from those six-month highs. Donald Trump was the reason for both the rise and fall, proving once again his ability to surprise the market with the unexpected.
The U.S. president also tested the intelligence of energy traders by feeding them one of the most ludicrous tales in oil, and getting at least some to buy the story. Trump opened the week by announcing that he was ending all sanction waivers for importers of Iranian oil. That was the surprise. Then came the ludicrous bit. He claimed on Friday that he had “called” OPEC to lower domestic gasoline prices, which are up 27% on the year.
It’s unclear how many traders genuinely believed Trump and how many just needed an excuse to cash out of a seven-week rally. U.S. pump prices are determined as much by fuel demand, stockpiles and refining margins as the crude provided by both OPEC and local drillers. In any case, Trump's story brought the runaway rally in oil to a screeching halt, handing bulls an unexpected 4% loss on the day and 2% setback on the week.
For the record, OPEC's Secretary General Mohammed Barkindo later denied having spoken with the president.
Also, the weekly reading on U.S. oil rigs published on Friday showed a startling drop of 20 rigs that took the count to a 13-month low. If anything, it was testimony of Trump’s inability to convince even domestic drillers to rally production to offset OPEC’s huge output cuts this year.
And the market may not have woken up fully to the severity of a contamination issue in Russian oil that has now shut down 1.5 million barrels per day in delivery to refineries throughout Europe.
Even so, Friday’s selloff was a signal that the upward momentum in oil could falter anytime, even with the (limited) restriction on Iranian oil now (we explain why below), separate U.S. sanctions on Venezuela and a civil war in Libya. One negative for oil prices has been climbing U.S. crude inventories
And for those who still believe in Goldman Sachs’ forecasts -- despite the Wall Street bank being more wrong than right these days on commodities -- Brent prices have already topped out for this quarter at $75. That means the 40% gain that oil bulls are sitting on for this year may have maxed for now, and there are other buckets within commodities that could be offering better alpha.
Gold may be one of those areas, with the Fed expected to stick to its dovish script in the coming week’s monthly policy meeting of the U.S. central bank. Those long on the yellow metal are looking at recapturing $1,300 pricing despite being socked for most of last week by a strong dollar. To gold bugs, Friday’s rebound particularly held promise it came after a vigorous quarterly reading for the U.S. GDP that should rightly sparked a Wall Street rally.
Energy Review
To reiterate, it was a big week for oil, with the Trump cabinet ramping up effort to bring Iranian crude exports to zero and the Rouhani administration to its knees. Neither would happen, say analysts who point to Beijing’s plans to continue buying oil from Tehran, and Iran’s proven legacy of being immune to the dictates of various U.S. presidents.
To many analysts it’s still unimaginable that Trump, who needs low oil prices, would seek a virtual ban on Iranian supply amid the continued squeeze on global production by a very determined Saudi Arabia and ongoing outages in Venezuela and Libya. A year ago, the president seemed alright in accommodating some of the “evil” the Rouhani regime was capable of, with U.S. midterm elections being just months away. But with the next presidential elections not until November 2020, and with a gleeful Saudi Arabia cheering from the sidelines at the prospect of its arch-rival being choked off the market, dealing Iran the ultimate punishment seemed right in Trump's eyes.
Aside from Trump’s disputable “call” to OPEC, the week was made more interesting by the Saudi Energy Minister’s thoughtful reminder to the president that the U.S. shouldn't count on the Kingdom to raise output immediately to make up for lost Iranian barrels. Khalid al-Falih maintained that he would provide customers of Saudi oil with as much as supply as they needed. But none would of it would be made preemptively on the notion that the market was short on oil, because it simply wasn't, he added. It was shrewd Saudi speak for "show us the money and we'll show you the oil". At near $65 for WTI and $75 for Brent, Falih can afford to drag out production. And to an extent, he was right about the market being adequately supplied, with Orbital Insight, a Californian company using satellite trackers, reporting that global crude inventories were up more than 140 million barrels year-on-year.
The other dark horse for production is the organic chloride contamination apparently coming through the Russian Druzhba (Friendship) pipeline that suspended the delivery of an estimated 1.5 million barrels per day to European refineries. The Druzhba network is one of the world’s largest and supplies refining plants in Germany, France and Italy while connecting smaller refineries throughout southeastern Europe. Seeking Alpha's energy writer Douglas Adams notes that cleanup could take weeks, even months, given the thousand of kilometers of pipeline that could possibly be involved.
In the energy corporate world, Occidental (NYSE:OXY)'s bid for Anadarko at $76 a share gave a heartburn to rival Chevron (NYSE:CVX)'s $65 bid. Oxy's bid consisted of half cash and stock, while Chevron’s was mostly stock. And that earlier bid was now worth even less, at around $62 a piece, with Chevron's stock decline in the past two weeks.
In natural gas, an inordinately large build of 92 billion cubic feet in last week’s storage and prices under near three-year lows raised questions on whether the fuel was cheap enough for U.S. utilities to switch in droves from using coal.
Energy Calendar Ahead
Tuesday, April 30
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, May 1
The EIA weekly report on oil stockpiles.
Thursday, May 2
EIA weekly natural gas report
Friday, May 3
Baker Hughes weekly rig count.
Precious Metals Review
After moving back-and-forth relentlessly on China and global economic concerns, gold started last week higher on the U.S.-Iran oil faceoff, which brought some old-fashioned geopolitical tensions back into bullion.
From there, it was an uneven track for the yellow metal as the dollar made one high after another on resilient U.S. data.
But the greenback’s run also came to a halt by the end of the week after an overall strong U.S. first-quarter growth report was overshadowed by soft inflation data.
The core personal expenditures consumption price index figure, the Federal Reserve’s preferred inflation gauge, increased at only a 1.3% rate versus 1.8% in the prior quarter, CNBC reported.
According to a Reuters poll, major central banks are done tightening policy as the global growth outlook has softened across developed and emerging economies, with scant prospects for a surge in inflation.
The soft global outlook could leave the Fed dovish again in its monthly policy meeting statement due on Wednesday, providing a boost for gold even when relatively-strong U.S. data should be beneficial for the dollar.
While gold has fallen more than 4% from a peak in February, bullion’s recovery from last week’s four-month low painted a neutral picture on technical charts, Reuters technical analyst Wang Tao said.
Goldman Sachs said central bank gold purchases have also been running strong, another factor that could underpin a return to $1,300 levels.
Precious Metals Calendar Ahead
Monday, April 29
EU consumer inflation expectations
US core price index (March)
US personal spending (March)
Tuesday, April 30
China manufacturing & non-manufacturing PMIs (April)
Eurozone prelim GDP (Q1)
Canada GDP (Q1)
Chicago PMI (April)
CB consumer confidence (April)
Pending home sales (March)
Wednesday, May 1
UK manufacturing PMI (April)
ADP nonfarm payrolls (April)
ISM manufacturing (April)
Federal Reserve rate decision & statement
Thursday, May 2
China Caixin manufacturing PMI (April)
UK construction PMI (April)
Bank of England rate decision
Initial jobless claims
Factory orders (March)
Friday, May 3
UK services PMI (April)
Eurozone CPI flash estimate (April)
U.S. Nonfarm Payrolls (April)
ISM non-manufacturing PMI (April)