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Energy & Precious Metals - Weekly Review and Calendar Ahead

CommoditiesJul 11, 2021 05:10AM ET
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by Barani Krishnan

Investing.com - “We are masters of our own commodity,” Saudi Arabia’s Sheikh Zaki Yamani declared after the 1973 Arab-Israeli conflict prompted the kingdom to trigger its second oil export embargo. 

A four-fold jump in crude prices followed, spinning western economies into recession in an ensuing oil-shock-and-inflation era. “The moment has come,” the Saudi oil minister said triumphantly, referring to the high point of power held then by the Organization of the Petroleum Exporting Countries, known simply since by its four-letter acronym: OPEC.

Yet, with the end of that war and the embargo, Yamani found an accommodation with the United States.

He became a price moderate, espousing the view that high prices would ultimately destroy demand and encouraged production from new exploration in places such as the U.K. North Sea, where today’s benchmark Brent crude comes from. When the 1979 Iranian revolution triggered a second oil shock in the West, most in OPEC raised oil prices. Riyadh, close now to Washington, issued the “Yamani Edict”, holding Saudi prices at official levels to ease the pain for importers.

One wonders whether such sensibility and accommodation will return to Saudi Arabia.

For a while, going into this month’s meeting of the OPEC+ — now a larger oil cartel grouping OPEC’s original 13 members led by Saudi Arabia with 10 other producers steered by Russia — it looked like Riyadh was exhibiting virtues from the Yamani era.

Prince Abdulaziz bin Salman, the Saudi energy minister in the hot seat now and sometimes referred to by his initials as “AbS” — said prior to the July 2 meeting: “We have a role in taming and containing inflation, by making sure that this market doesn’t get out of hand.” 

What he was saying was after this year’s crude rally of more than 50%, it was time to raise, rather than double down on, production cuts. Even with the minimum hike of 400,000 barrels per day initially bandied around for August, OPEC+ would still be withholding about 5.5 million barrels from the market daily.

Yet, once the Zoom meeting among the OPEC+ ministers began, it became clear that the United Arab Emirates, once the Saudis’ biggest allies within the cartel, had different ideas from Riyadh’s. With the Emiratis frustrated by Saudi refusal to lift UAE’s all-important production base that would allow Abu Dhabi to put out even more barrels, a deal appeared doomed. And that’s how it ended. 

To ensure the market did not take away the “wrong message”, some OPEC+ delegates to the meeting anonymously told the press that the cartel's status quo on production will prevail. This meant that July’s export quotas will apply for August. And, yes, there will be no hikes.

Of course, the market had a right to take away “whichever message” it wanted from the meeting, especially with the spectacular manner in which it had failed to reinforce OPEC+ unity at a time it was most needed, and brought the simmering Saudi-UAE tensions out into an open, ugly fight.

So, after U.S. crude hit a seven-year high just shy of $77 a barrel on the logic that the-tighter-the-market-the-better, prices collapsed by almost 6% over the next two days as it dawned on some of the smarter ones in the trade that contrary to status quo, it might actually be a free-for-all for production, given that the UAE may no longer be respecting limits. These folks had another major worry: the Delta variant of the COVID-19 (which, interestingly, was the reason AbS gave for not willing to bump up UAE’s production base). 

But logic is also a dispensable commodity in the oil trade. No sooner had prices tumbled their most in three weeks over just 48 hours, buying-on-the-dips emerged and over the next two days, the market recovered almost all it lost. As the week ended, U.S. crude was down just 0.6% on the week while Brent lost 0.8% — a pretty modest slide, given the dynamics of the situation.

So is OPEC+ out of the woods then? 

Far from it, is the answer. And you can add a few more ‘a’s after the ‘f’ in that “far”.

As Ed Moya, who heads U.S. research at online broker OANDA, put it, this week’s  loss on crude was a tiny red bleep coming after six straight weeks of gains. It was  small enough for longs in the market to shrug off. 

But the broader troubles within OPEC+ — with both the Saudis and Emiratis digging their heels in and the rest of the 21 countries wondering how the standoff will end — were big enough to stay on traders’ minds, he said.

“Energy traders can’t get a handle on what crude supply to expect in August,” said Moya.  “The short-term supply side uncertainty suggests we could see a shortfall in the coming weeks, but that it could threaten the stability that has come from the coordinated efforts made by OPEC+.”

Something else has come calling: Washington.

After months of barely emitting a squeak as prices climbed from $40 to $50 to $60 and above $70 now, the White House said last week that it wished to see more oil on the market via an OPEC+ deal. In a statement directed at the alliance, the White House said: 

"We are not a party to these talks, but administration officials have been engaged with relevant capitals to urge a compromise solution that will allow proposed production increases to move forward."

The statement came on the heels of Friday’s regular White House media briefing, where Press Secretary Jen Psaki voiced concerns about the impact of rising oil prices on American consumers. 

The remarks were the kind of their kind by the Biden administration since it came to office in January, signaling it was finally awakening from its slumber to the inflation impact from oil as gasoline prices at pumps hit new seven-year highs above $3 per gallon. 

One reason for crude’s rally this year, aside from economic recovery from the pandemic, has been the administration’s laser focus on renewable energy versus fossil fuels. This has resulted in a clampdown on drilling that has stymied much of U.S. oil production, ceding control to OPEC+.

With Washington seeking the Saudi hand again to control inflation at home, the question to be answered is whether Riyadh will show its magnanimity of the past? 

Or will greed get the better of OPEC, which critics say never knows when to say “Enough!” to a good thing? Crude prices have more than tripled from the pandemic lows of last year, yet the Saudis hiked their OSP, or official selling price, right after the breakdown in talks with the UAE. The rationale? To milk as much as possible the current upside in the market, of course. And this comes from an energy minister who just spoke earlier of responsibility in “taming and containing inflation”.

Still, some believe neither Saudi Arabia nor the UAE will allow the oil production crisis to fester for too long. 

Adel Hamaizia, associate fellow with the Middle East and North Africa Programme at Chatham House in London, told Al-Jazeera in a commentary that the more likely outcome is that Saudi Arabia and the UAE will find ways to manage their differences, and he warns against discounting the resilience of organisations like OPEC and the Gulf Cooperation Council, where both countries were heavyweights.

“Politically, there is still a lot that unifies the Gulf member states, not to mention family, tribal and business ties,” Hamaizia said.

Bader Mousa Al-Saif, a nonresident fellow at the Malcolm H Kerr Carnegie Middle East Center in Beirut, concurred.

“Saudi Arabia and the UAE are both changing and realise that they are not the same countries they were when they formed the strong alliance,” Al-Saif said. “But it doesn’t make sense for either one of them to let go of the other.

Oil Price Roundup

New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, settled Friday’s trade at $1.62, up 2.2%, at $74.56. On Monday, WTI hit a 2014 high of $76.98 and Friday, it did a final pre-weekend trade of $74.63. For the week, it fell 0.6%.

London-traded Brent, the global benchmark for oil, settled at $75.55, up $1.43, or 1.9%, on the day. Brent did a final pre-weekend trade of $75.59. For the week, it lost 0.8%.

Energy Markets Calendar Ahead

Monday, July 12

Cushing inventory data from surveyor Genscape

Tuesday, July 13

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, July 14

EIA weekly report on crude stockpiles

EIA weekly report on gasoline stockpiles

EIA weekly report on distillates inventories 

Thursday, July 15

EIA weekly report on natural gas storage

Friday, July 16

Baker Hughes weekly survey on U.S. oil rigs

Gold Market and Price Roundup 

Gold posted a third straight weekly gain on Friday, returning to crucial $1,800 support. But outlook for the yellow metal’s fans remained muddy, with no certainty on how long it will take for the much-touted U.S. inflation to accelerate its gains.

Front-month gold futures on New York’s Comex settled at $1,810.60, up $10.40, or 1.5% on the day. 

The benchmark gold futures has gained around $40, or 2.3%, since its last negative weekly close four weeks ago, when it also tumbled to a two-month low of $1,761.20.

Gold’s rise on Friday was fueled by a weaker dollar and a rally in bonds that pushed Treasury yields lower. Both the U.S. currency and yields work in contrary mode to the precious metal.

“Gold is tentatively stabilizing above the psychological $1,800 level and that could open the door for a stronger rebound next week,” said Ed Moya, head of U.S. research at online broker OANDA. 

Yet, there was no certainty about how much impact current inflationary trends in the United States will have on gold, which is generally branded as a hedge against rising pressure prices, Moya said. 

“Investors will closely await Tuesday’s inflation report and kickoff to earnings season,”  he said, referring to the June update for the Consumer Price Index, which hit a 13-year high of 5% in the 12 months to May.

Conviction has become a rare commodity in gold as the average long investor tried to stay true to the yellow metal through its travails of the past six months. 

Since January, gold has been on a tough ride that actually began in August last year — when it came off record highs above $2,000 and meandered for a few months before stumbling into a systemic decay from November, when the first breakthroughs in COVID-19 vaccine efficiencies were announced. At one point, gold raked a near 11-month bottom at under $1,674.

After appearing to break that dark spell with a bounce back to $1,905 in May, gold saw a new round of short-selling that took it back to $1,800 levels before talk of monetary tightening by the Federal Reserve knocked it even lower to mid-$1,700 levels.

For the record, the Fed has indicated that it expects two hikes before 2023 that will bring interest rates within a range of 0.5% to 0.75% from a current pandemic-era super-low of zero to 0.25%. It has not set a timetable for the tapering or complete freeze of the $120 billion in bonds and other assets it has been buying since March 2020 to support the economy through the COVID crisis.

That has, however, not stopped senior bankers on the central bank’s all-important FOMC, or Federal Open Market Committee, from commenting on the likelihood of a taper or rate hike in their public speeches. Typically, each hawkish speech on a taper or rate hike by a Fed official ends up hammering gold more than than a dovish comment would lift it.

Also, amazingly lost in the whole transition is gold’s position as a hedge against inflation despite trillions of dollars of government spending since the outbreak of the pandemic.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditure Index, meanwhile, grew by a multi-year high of 3.4 percent in the 12 months to May. 

Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.

 

Energy & Precious Metals - Weekly Review and Calendar Ahead
 

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Comments (6)
Ioannis Lazaridis
Ioannis Lazaridis Jul 11, 2021 2:44PM ET
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FED Two hikes before 2023.... This is a very serious information that only here is written . Great news. Then , gold's position as a hedge against inflation... Inflation can be 15% and resl returns 15% . Gold remains low as long as real rates are zero or even -1% as currently are. Barani Krishnan is pleasing him self by writing long articles. Content...? Don't worry be happy. 2 hikes before 2023.
Barani Krishnan
Barani Krishnan Jul 11, 2021 2:44PM ET
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Not sure what you getting at Loannis, but trust it's good :)
CHADWICK RICHINGTON
CHADWICK RICHINGTON Jul 11, 2021 2:11PM ET
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Long story short: keep buying physical gold
Barani Krishnan
Barani Krishnan Jul 11, 2021 2:11PM ET
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Ultimately, yes, you can't go wrong with that.
CHADWICK RICHINGTON
CHADWICK RICHINGTON Jul 11, 2021 2:11PM ET
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Barani Krishnan barani is the man!
jason xx
jason xx Jul 11, 2021 1:51PM ET
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They didn't say 2 rate hikes in 2022? No way they said in 2023 I thought? Any source on the fed saying 2 rate hikes guaranteed in 2022?
Marshall Caggiano
Marshall Caggiano Jul 11, 2021 10:32AM ET
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Great general article. Not sure it added to the body of knowledge. Not sure anything can until something changes .
Barani Krishnan
Barani Krishnan Jul 11, 2021 10:32AM ET
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Hello Marshall, thanks much for the feedback, mate. This is actually meant to be a weekly review; so yes, it may not add greatly to the body of knowledge, as you allude. But I got deeper into the OPEC/Yamani history for context, and hope that justified the end.
John Brannon
John Brannon Jul 11, 2021 9:26AM ET
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Good morning Mr. Krishnan,  I remember the 1973 embargo - gasoline expense went from being something you didn't really notice, as a teenager making the minimum wage of about $1.50 / hour, to an entire work day to fill-up a Pontiac Grand Prix. I suppose today's non-legislated, but apparent minimum wage of $15 / hour, requires about one-half of a work day for a fill-up at the $3 / gallon price in my region.  Reading some of the thoughts regarding the UAE, after the spat, it appears they might be beginning to view oil as a possible stranded asset in the decades ahead, and want to hasten the depletion of that asset. Bin Salman has been fortunate - when I'm that confident it usually has preceded a fall.  Thanks for the good article and very best regards.
Barani Krishnan
Barani Krishnan Jul 11, 2021 9:26AM ET
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Thanks much for that great perspective and feedback, Mr Brannon. Indeed, there's a reason for the reason that history often repeats itself because mankind never learns. Do keep commenting as truly enjoy your insight as always. Bests!
John Brannon
John Brannon Jul 11, 2021 9:26AM ET
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Barani Krishnan  All the "Mr. Brannons" are dead. Please call me John.    :)
Barani Krishnan
Barani Krishnan Jul 11, 2021 9:26AM ET
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John Brannon  Ha ha ... will do, John :) And I'll be Barani then. Bests, mate! (Typo earlier; what I meant to say is "Indeed, there's a reason why history often repeats itself, because mankind never learns."
musa abba
musa abba Jul 11, 2021 9:19AM ET
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how much
 
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