By Barani Krishnan
Investing.com – An unimaginable bullish cocktail for crude, and what did we get in the end? A 5% gain on the week that not many analysts are confident will be retained through next week.
Oil had some of its best supportive factors this week: A storm that cut by more than half oil production in the Gulf Coast of Mexico; Iran’s tit-for-tat attempts to seize a British tanker; an unexpectedly large drawdown in U.S. crude stockpiles; OPEC mulling indefinite output cuts as U.S. shale becomes a permanent threat and Federal Reserve Chair Jerome Powell making his strongest case yet for a rate cut.
Yet, just as the week was drawing to a close, the International Energy Agency – the perma-nemesis of oil bulls – was ready with the proverbial bucket of cold water to douse any heated rally. The IEA’s “main message”: the world had lived through a supply surplus of nearly 1 million barrels per day in the first six months of 2019 despite aggressive OPEC cuts, and the market is setting itself up for a second half glut too as U.S. shale supply is not expected to let up.
“The usual result that I see in a bull run are lot of bulls,” said Scott Shelton, energy futures broker at ICAP in Durham, N.C. “This one feels different.”
“It feels like the market is not a believer of this rally,” he added.
It could be a better week ahead for gold.
Gold longs share Powell’s feeling for a rate cut more than many may think. After a knee-jerk drop early on Friday following even a stronger-than-expected reading for producer price inflation, both bullion and futures of gold advanced on bets for a Fed easing in the next three weeks.
Energy Review
West Texas Intermediate crude ended the week up nearly 5% while U.K. Brent oil booked an almost 4% gain.
The rally was underpinned by the outsize U.S. crude inventory drawdown of 9.5 million barrels in the week to July 5, versus forecasts for a draw of 3.08 million barrels.
Oil prices were also supported by Tropical Storm Barry’s targeting of the Louisiana coast and production and refining platforms on the Gulf of Mexico – half which had to close, cutting more than 1 million bpd in output.
Bulls also got a lending hand from Powell who all but confirmed to Congress a rate cut when the Fed meets July 30-31.
In Friday’ session, both WTI and Brent started the U.S. session on a somewhat wobbly footing after the IEA predicted the return of an oversupplied market next year despite OPEC’s production cuts being in full gusto.
Just a day earlier, the Organization of the Petroleum Exporting Countries estimated in its July report that it will be producing about 560,000 bpd more than needed by next year, no thanks to the continued surge in U.S. shale oil output.
The report suggested that the Saudi-led OPEC and its key non-member ally Russia, might be cutting production indefinitely beyond its currently set deadline of March 2020.
Energy Calendar Ahead
Tuesday, July 16
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, July 17
EIA weekly report on oil stockpiles.
Thursday, July 18
EIA weekly natural gas report
IEA monthly report
Friday, July 19
Baker Hughes weekly rig count.
Precious Metals Review
For the week, both bullion and Gold futures prices remain about 1% off highs hit earlier in the week on the back of Fed Chair Powell's congressional testimony.
Gold prices moved forcefully into $1,400 territory on Wednesday after Powell’s remarks on business and economic conditions in his testimony to Congress raised gold bulls’ conviction that a rate cut of at least 25 basis points was almost a certainty at the forthcoming July 30-31 Fed meeting.
Powell has been under tremendous pressure from U.S. President Donald Trump to authorize a rate cut soon, with the president indicating he will even fire him if he doesn’t. The Fed chief has maintained that he will not be politically cowed or resign even if Trump demands for it.
Investors have rushed into gold over the past two months, pushing the yellow metal from $1,200 levels to $1,400, as talk of a rate cut that will weaken the dollar and boost gold came into play. The Dollar Index, which pits gold against a basket of currencies, has surprisingly yielded little since Powell began his dovish trip, hitting just one-week lows.
Data on Friday showed that headline inflation at factory gates rose 1.7% from a year earlier in June, topping expectations for a larger drop to 1.6%. The core annualized reading of the data that removes volatile food and energy components unexpectedly held steady at 2.3%.
The readings follow a similar picture painted Thursday by core consumer prices that also unexpectedly ticked higher in June.
Gold prices, which benefit from decreasing interest rates that lower the opportunity cost of holding non-yielding bullion have seen a bumpy ride this week as Powell’s apparent commitment to policy easing sent the precious metal soaring 1.15 percent.
Although these stronger-than-expected inflation readings are not likely to be considered a game changer for the Fed, they do call into question Powell’s concerns that weak inflation could be more persistent than originally expected.
Precious Metals Calendar Ahead
Monday, July 15
NY Empire State Manufacturing Index (Jul)
Tuesday, July 16
German ZEW Economic Sentiment (Jul)
Trade Balance (May)
FOMC Member Bostic Speaks
U.S. Core Retail Sales (Jun)
U.S. Import Price Index (YoY)
U.S. Retail Sales (Jun)
Industrial Production (Jun)
Manufacturing Production (Jun)
Business Inventories (May)
NAHB Housing Market Index (Jul)
Wednesday, July 17
EU Core CPI (Jun)
U.S. Building Permits (Jun)
U.S. Housing Starts (Jun)
U.S. Housing Starts (Jun)
Thursday, July 18
U.S. Continuing Jobless Claims
U.S. Initial Jobless Claims
U.S. Jobless Claims 4-Week Avg.
U.S. Philadelphia Fed Manufacturing Index (Jul)
U.S. Philly Fed Business Conditions (Jul)
FOMC Member Bostic Speaks
Japan National CPI (Jun)
Friday, July 19
German PPI (Jun)
German WPI (Jun)