By Barani Krishnan
Investing.com – The bigger they are, the harder they fall. And 10 million barrels of crude inventories were big enough to bring oil prices crashing down last week as the market awoke to the fact that there was something bigger than OPEC cuts: demand.
With the latest inventory spike, a generous 30 million barrels have been added to U.S. crude stockpiles in just over five weeks, a statistic certain to perish any thought the Saudis and other powers that be at OPEC may have had of raising production when they meet on June 25.
Many theories abound as to the reason for the builds. The bears say it is an outright reflection of weak demand. The bulls argue that they are an extension of the export issues at the Houston Ship Channel since a chemical fire in early March and remedy works thereafter that were still disrupting oil flows there. Analysts such as Reuters’ John Kemp suggest higher-than-usual maintenance work undertaken by refiners this spring to avoid shutdowns later in the fall and winter, as they prepare for the launch of low-sulfur marine fuels under the International Maritime 2020 standards.
Whatever the reason, the inventories have been worrying enough for market participants to stop the oil rally that had been raging since March in its tracks. Last week’s loss was the second in a row after non-stop gains in seven earlier weeks. With the Energy Information Administration estimating another record high in U.S. production and oil services firm Baker Hughes reporting weekly oil rigs that could turn much higher anytime, caution would be the wordwatch for oil longs.
In gold, too, there’s just as much uncertainty on the direction for the yellow metal, after Friday’s outstanding U.S. jobs report sent both bullion and futures prices on Comex up, confounding expectations for the dollar to rise instead.
Energy Review
Crude futures crawled out of a two-day hole on Friday after a blockbuster U.S. jobs report for April lifted Wall Street's main indexes and appetite across risk assets, including commodities.
Yet the rebound wasn’t even enough to reset the market into positive mode for the week.
It was an unusually choppy week for oil, capped by a 2.2% percent drop in the U.S. West Texas Intermediate benchmark and 1.7% in U.K.’s Brent futures.
After starting Monday lower on U.S. President Donald Trump’s dubious claim from the previous week that he had called OPEC to lower gasoline prices, WTI and Brent experienced a pop on Tuesday after Saudi Energy Minister Khalid Al-Falih said Riyadh won't rush to fill a supply shortage caused by the U.S. embargo on Iranian oil exports.
Yet, nothing could have prepared oil bulls for Wednesday’s routine report from the EIA that showed a 9.9 million barrels build for the week ended April 26. The market had expected a rise of just around 1.5 million barrels. That day alone, WTI fell as much as 4% at the session lows, hitting a one-month bottom beneath $61 per barrel.
Even Phil Flynn, an analyst at The Price Futures Group in Chicago who's typically bullish on oil, asked in his daily note "whether the massive crude oil supply increase is due to the continuing fallout from Houston Ship Channel closures or ... a sign that demand is faltering? Or is it just more shale oil?”
Notwithstanding the week’s losses, WTI remains up 36% on the year while Brent's gain is about 32%. Retail gasoline prices have shown no signs of slowing, with a 28% gain year-to-date, according to the American Automobile Association.
Energy Calendar Ahead
Tuesday, May 7
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, May 8
The EIA weekly report on oil stockpiles.
Thursday, May 9
EIA weekly natural gas report
Friday, May 10
Baker Hughes weekly rig count.
Precious Metals Review
Will gold reclaim its $1,300 perch?
Those who anticipated the U.S. jobs report on Friday to sound the death knell for gold after the less-dovish Fed from earlier in the week ought to think again.
Bullion and futures of gold rebounded after Thursday's tumble that took prices of the yellow metal to four-month lows.
Gold futures for June delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $9.30, or 0.7%, at $1,281.30 per ounce. The previous day, June gold fell 1% for biggest one-day percentage decline in over two weeks.
"This shows that gold's good run isn't over despite the Fed's latest stance and there is a need for bullion investors to refocus on the longer term," said George Gero, precious metals analyst at RBC Wealth Management in New York.
The Federal Open Market Committee kept the benchmark interest rate unchanged on Wednesday, in line with the market’s expectations. But the central bank also emphasis that it saw no compelling reason to consider a rate cut any time soon, citing rising employment and economic growth.
Even so, holdings in the world’s largest gold-backed exchange-traded fund (ETF), SPDR Gold Trust (P:GLD), fell about 0.2% to 745.52 tonnes on Thursday, its lowest since Oct. 12, Reuters reported.
“The ETF holdings in gold continue to decline and in the last few week specs on COMEX switched from net long to net short as there is a risk on approach from investors,” ING analyst Warren Patterson was quoted as saying.
Precious Metals Calendar Ahead
Monday, May 6
EU Services, Composite PMI (April)
EU Retail Sales (March)
Chicago Fed President Evans Speaks
FOMC Member Harker Speaks
FOMC Member Williams Speaks
ECB's Praet Speaks
Tuesday, May 7
RBA policy meeting
FOMC Member Kaplan Speaks
FOMC Member Quarles Speaks
China Trade Balance (Apr)
Wednesday, May 8
RBNZ policy meeting
China CPI, PPI (Apr)
ECB Monetary Policy Minutes
Germany industrial production (Mar)
Thursday, May 9
U.S. PPI (Apr)
U.S. Fed Chair Powell Speaks
U.S. Initial Jobless Claims
U.S. Trade Balance (Mar)
Friday, May 10
German Trade Balance (Mar)
French Industrial Production (Mar)
U.K. GDP, industrial production, trade balance
U.S. CPI (Apr)
FOMC Member Bostic Speaks