By Barani Krishnan
Investing.com - For what it was worth, Halloween lived up to its name, providing a spooky week for oil and gold investors - for both the right and wrong reasons.
The first scare came for oil bulls on Thursday as Bloomberg reported fresh potential troubles in China-U.S. trade negotiations, just a day after a huge build in U.S. crude stockpiles for the week ended Oct. 25. The drop of about 1% in oil prices seemed appropriate.
Then, it was the turn of oil bears to be horrified by the market’s reaction to positive U.S. jobs data the next day, as well as China’s remarks that it had reached a consensus with the White House on core concerns in their trade war. Crude prices not only recouped what they lost on Thursday but also jumped 4% — all on Beijing’s assurance that there’ll be even more talks.
In between all this, gold, as anticipated, sank under the key $1,500 mark on Wednesday after the Federal Reserve delivered the widely-expected third quarter point rate cut of the year, without saying if it will do more.
Then, latching on to the coattails of Thursday’s Bloomberg story on China, the yellow metal returned to the $1,500 mark a day after vacating that spot, to the dismay of gold bears.
But in the most bizarre of happenings, it advanced in that zone on Friday - albeit modestly - as markets went overboard with risk on the renewed fervor over the China-U.S. talks. Any safe-haven should have plunged in that environment. Gold bulls instead justified the rally by pointing at the weaker dollar.
So a scary week indeed.
For the record, West Texas Intermediate, the benchmark for New York-traded crude, settled at $56.20 per barrel, down 0.8% on the week — despite the 3.7% surge on Friday.
Brent, the London-traded global gauge for oil, settled at $61.69, up 0.2% on the week - after climbing 3.5% on Friday.
Energy Review
From the oil market’s perspective, only two things really deserve to be analyzed for the week that was: the crude oil build announced by the EIA on Wednesday and the U.S. job numbers for October, released Friday.
Crude stockpiles rose by 5.7 million barrels for the week ended Oct. 25, the Energy Information Administration said. The market was looking for a rise of about 494,000 barrels, according to forecasts compiled by Investing.com.
Production remained stubbornly at record highs of 12.6 million barrels per day (bpd) for a fourth week running, the EIA said, despite the number of rigs actively drilling for oil collapsing to 30-month lows.
On the demand side, gasoline inventories fell by about 3 million barrels, versus forecasts for drawdown of about 2.19 million barrels.
But distillate stockpiles declined by only 1 million, compared with expectations for a drop of 2.35 million. That’s a sign that the large implied demand seen for diesel, jet oil and other transportation fuels through most of October may be thinning.
One reason for the smaller inventory drawdown in distillates could be that refiners who had just come out of maintenance had intensified their production of middle barrel products, adding to the floating supply of those. Refinery runs did increase by 2% during the week. But at 87.7% of operable capacity, they are still well below the norm of at least 90% for this time of year.
So, it remains to be seen what the next EIA dataset will bring on oil production and demand.
Next up are the job numbers.
U.S. nonfarm payrolls rose by 128,000 last month, according to the Labor Department. Analysts polled by Investing.com only had a consensus for a rise of 89,000. That was a 45% beat — huge by any standards. As a caveat, September's hiring was revised up to 180,000 from an initially-reported 136,000. Even so, the numbers were bullish and received the right response from the market, sending the S&P500 to record highs.
Yet job numbers aren’t a certainty. Each month could be different. And until the threat of the trade war is fully or sufficiently defused and permanent or acceptable solutions are found for Brexit and other troubles, global oil demand could remain in limbo.
On top of this, U.S. GDP dropped to an annual rate of 1.9% in the third quarter. While that was above Wall Street expectations, it still raised concerns about investment and growth ahead as the stimulus from tax cuts disappears.
Taking all this into consideration, the International Energy Agency has rightly cut its demand outlook for oil for the current year and next.
While noting that demand rose by 800,000 bpd in July and 1.4 million bpd in August, the IEA lowered its forecast for demand growth in 2019 by 100,000 barrels to around 1.0 million bpd. It reduced its forecast for 2020 by the same amount to 1.2 million bpd.
Energy Calendar
Monday, Nov 4
Genscape Cushing crude stockpile estimates (private data)
Tuesday, Nov 5
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Nov 6
EIA weekly report on oil stockpiles
Thursday, Nov 7
EIA weekly natural gas report
Friday, Nov 8
Baker Hughes weekly rig count
Precious Metals Review
Stellar U.S. jobs growth for October and indication of high-level progress in China-U.S. trade talks whetted investors’ appetite for risk on Friday and weakened their inclination to hold safe-havens. Yet, gold held to its $1,500 perch, proving few were willing to abandon the yellow metal.
Gold futures for December delivery on COMEX settled down $3.40, or 0.2%, at $1,511.40 per ounce. It rose 1.2% in the previous session on reports of renewed troubles in U.S.-China negotiations. But it was back in the green lane in post-settlement trade, rising a modest 15 cents to $1,514.95 by 2:45 PM ET (18:45 GMT).
Spot gold, which tracks live trades in bullion, was up 8 cents at $1,512.70.
Gold’s resilience above the $1,500 level surprised some market participants who had expected the yellow metal to tumble sharply after the Federal Reserve all but indicated an end to further rate cuts after Wednesday’s third 25-basis point reduction since July.
TD Securities, however, said in a note that many investors still needed a hedge against stock market risks and the potential for rate cuts continuing in 2020.
“It is likely the majority of investors have opted to hold onto their precious metal exposure as increased data dependency and persistent inflation weakness leaves the door open for further cuts into 2020,” the brokerage said.
“As the outlook becomes more data dependent moving forward, we expect the yellow metal to be fairly volatile on either side of $1,500/oz, until a trend of weaker data sparks further cuts in 2020,” it added.