By Barani Krishnan
Investing.com -- The big story in oil this week was not its near 7% price drop. The virtual one-way trade in crude since the end of October had finally been broken; that was the real story.
For more than four months, oil prices went largely in one direction - up - as they were driven by OPEC+ production cuts, the promise of economic reopenings from Covid-19 closures and a blockbuster U.S. pandemic relief that was underway.
Virtually overlooked was the anemic demand for jet and other transportation fuels as global travel remained heavily curtailed by the pandemic.
Europe’s constant struggle with new outbreaks of infections; its alarmingly slow pace of vaccinations; and fresh lockdowns on the bloc were also treated with little seriousness.
Queries inconvenient to the bull narrative were hushed up with data showing that oil inventories in the OECD group of developed nations were already near five-year seasonal trends, and will get better with even more production cuts, never mind demand. In fact, the underlying theme was that it was better not to talk about demand at all, given its subjectivity due to the pandemic.
In that environment, New York-traded West Texas Intermediate, the benchmark for U.S. crude, rose from a little under $36 per barrel on October 30 to just under $68 by March 8. London-traded Brent, the global benchmark for oil went from under $38 to just above $71 in that same stretch.
If that wasn’t enough, Steven Kopits of Princeton Energy Advisors and Craig Johnson from Piper Sandler were calling for $100 per barrel, possibly by the year-end. In fact, it's the forecasts of investment banks and their self-fulfilling prophecy - the more they are repeated, the more they are believed - that took Brent beyond the $60 and $70 targets within the first two months of this year.
But Kopits and Johnson had also probably forgotten about a certain Arjun Murti from Goldman Sachs who, in 2008, called for $200 oil when it was trading under $112 months before the financial crisis. We all know what happened after oil got to $147 that year.
The fact of the matter is ingrained in that golden quote: “Nothing goes on forever”.
There’s also another saying: “It doesn’t rain but it pours”.
Both were perfectly appropriate for oil this week, as all the discomforting queries about demand, trickling in since the start of the year, turned into a perfect storm on Thursday.
Crude markets began the day with a sledgehammer dealt to dollar-denominated commodities by a greenback at November highs and U.S. 10-year Treasury yields at 13-month peaks. Then, headlines about Germany’s largest one-day surge in Covid-19 cases since January, a spate of new lockdowns in Italy and a growing vaccine crisis across the Eurozone jumped onto crude traders’ screens. Suddenly, the floor under oil gave way.
As the dust settled for the day, both WTI and Brent lost nearly $5 per barrel - their most since June 11.
By Friday’s session though, the two benchmarks regained nearly $1.35 on the average as weakening bond yields and a dollar retreating from session highs sparked buying of oil on-the-dips.
But the sell-off from the day before had already shattered the so-called invincibility of the four-month long oil rally.
After Thursday’s tumble, some oil bears were calling for WTI in the low $50s and sub-$60 Brent.
To me, a more likely scenario going forth is one of higher volatility, where fresh positives lift prices and negatives correct the froth. It’s what you’d expect of a normal market — one that had been virtually non-existent in oil since October.
John Kilduff, founding partner at Again Capital, a New York-based energy hedge fund, concurs.
“The magic of the so-called one-way trade has been broken,” said Kilduff. “There’s a reset now of expectations, and that below $60 WTI is possible again if the market gets ahead of itself, without supportive data.”
For now, there are almost as many upsides to oil as there are downsides.
The positives include the United States administering its first 100 millionth COVID-19 vaccine and the approval given by Europe's medicines regulator to the Oxford-AstraZeneca dose that at least a dozen countries in the bloc had stopped using out of safety concerns.
The negatives include the oncoming refinery maintenance season that could raise U.S. crude stockpiles, the possibility of more crude production in a politically-unified Libya and higher exports of oil from still-sanctioned Iran that could offset some of the bullish sentiment delivered by OPEC+ cuts.
Technical charts also indicate more volatility ahead.
“Further upside for WTI is subject to it reaching $63.10,” said Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India. “Failure to do could open it to the risk of a bottom below the recent $58.23.”
In gold’s case, it logged a second straight weekly gain, indicating that investors in the yellow metal were getting adjusted to a ramping dollar and spiking U.S. bond yields as the “new normal” they had to navigate amid the environment of higher inflation.
“The next few months will be very tricky in identifying what will be the primary catalysts for bullion investors,” said Ed Moya, analyst at New York’s OANDA. “Wall Street will remain fixated on the bond market selloff and recent disdain for technology stocks.”
Moya said gold was beginning to gain some investor attention because rising Treasury yields will eventually be countered by action from the Federal Reserve. “The S&P 500 index won’t be able to climb higher if mega-cap tech stocks don’t get their groove back and any hesitancy in that trade should trigger some safe-haven flows into gold.”
For decades, gold was touted as the best store of value whenever there were worries about inflation. Yet, in recent months, it was deliberately prevented from being the go-to asset for investors as Wall Street banks, hedge funds and other actors shorted the metal while pushing up U.S. bond yields and the dollar instead.
Bond yields have surged on the argument that economic recovery in the coming months could extend beyond Fed expectations, leading to spiralling inflation, as the central bank insists on keeping interest rates at near zero.
The dollar, which typically falls in an environment of heightened inflation fears, also rallied instead on the same runaway economic recovery logic. The greenback’s status as a reserve currency has bolstered its standing as a safe haven, leading to new long positions being built in the dollar.
The surging dollar and bond yields have been an anathema to gold, forcing the yellow metal to lose 17% from record highs of nearly $2,100 in August. Any indications by the Fed that it will intensify bond buying in the coming months could just be the thing to clamp down on yields and spark a rally in gold.
But Fed Chairman Jay Powell in his monthly news conference on Wednesday declined to give any hint of the central bank adding to its Treasury purchases.
Powell said that as the year progresses, the U.S. jobless rate will likely decline from February’s 6.2% while inflation expands 2.4% amid an overall 6.5% growth in GDP expected in an economy rebounding from a pandemic-stricken 2020.
Thus, it will be a wait-and-see for further tinkering of Fed policy, he said.
Gold is in a better position now, rising 0.7% month-to-date, after the 9% drop in January through February. But its return to $1,800 and beyond will also be a wait-and-see of the Fed and the S&P.
Gold Price & Market Brief
Gold for April delivery on New York’s Comex did a final trade of $1,743.90 before the week. It settled Friday’s official session at $1,741.70, up $9.20, or 0.5%.
For the week, the benchmark gold futures contract gained 1.3%, similar to the week before. In three prior weeks, gold futures fell consecutively, leaving longs in the yellow metals almost 7% poorer.
The spot price of gold, which fund managers sometimes rely on for direction more than futures, settled on Friday at $1,745.40, up $8.68, or 0.5%. It rose 1.0% on the week, adding to the prior week’s gain of 1.5%.
Oil Price & Market Brief
New York-traded West Texas Intermediate, the benchmark for U.S. crude, did a final trade of $61.46 before the weekend. It settled Friday’s session at $61.42, up $1.42, or 2.4%. For the week though, WTI fell 6.4%.
London-traded Brent, the global benchmark for oil, did a final trade of $64.55 per barrel before the weekend. It settled Friday’s session at $64.53, up $1.25, or 2%. For the week Brent lost 6.8%.
Energy Markets Calendar Ahead
Monday, March 22
Private Cushing stockpile estimates
Tuesday, March 23
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, March 24
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, March 25
EIA weekly report on {{ecl-386||natural gas storage}
Friday, March 26
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.