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Energy & Precious Metals - Weekly Review and Calendar Ahead

CommoditiesNov 14, 2021 07:09AM ET
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By Barani Krishnan

Investing.com -- How much time does Joe Biden have before oil gets to $100 a barrel?

Almost every oil trader and his grandmother - which is everyone, really - seems to think that crude is on its way to three-digit pricing; the only question is when it’ll get there. 

One reason it hasn’t happened yet is because the president has bought himself some time with tough talk against OPEC and the energy industry in general, which he has accused of price-gouging.

At the same time, most are convinced that Biden doesn’t have too many options to stall one of the greatest bull markets in oil’s history.

With each passing day, with the Inflation Bomb ticking under him, he has to quickly and strategically think of a way to defuse that I-Bomb before it ends up blowing away a good part of his economic agenda and, possibly, his presidency.

The popular opinion on both Main Street and Wall Street is that Biden will order the release of oil from the U.S. Strategic Petroleum Reserve (SPR) to counter the notion that the market is apocalyptically undersupplied. I use “notion” purposefully here. 

As much as the three-year lows now in Cushing inventories and the dismal growth in Bakken-Permian output and rig counts - not to mention the jet fuel demand expected from next year’s take-off in international level - the so-called tight-oil idea has been blown out of proportion by the long crowd in crude that has used every little market snippet in its favor to add a dollar or more to prices each time. 

The result is the implosion we got earlier this week when the gravity of the long-only BS got too much for a market that had endured it for nine straight weeks. Of course, the rally in crude is nowhere over, as you can read from my market wrap below. But it’s also good to remember there’s only so much fertilizer that even the bulls will be allowed to lay on this market.

Now back to Biden and his potential use of the SPR, which amusingly had seen a range of signals from his own energy czar and administration: Outright endorsement at first from Energy Secretary Jennifer Granholm (in an Oct 6 Financial Times story) before the Energy Information Administration poured cold water on it (no, no ... no SPR release nor ban on U.S. crude exports for now, the EIA said) before Granholm reactivated the plan (sort of) by saying Biden President Joe Biden could take action this week to address soaring gasoline prices. 

Well, the week came and went, with no such action from Biden, Granholm or the EIA. What the EIA announced, however, in its monthly Short-Term Energy Outlook on Wednesday, was that global crude benchmark Brent will likely trade at around $82 per barrel for the rest of the year before dipping by $10 next year.

“If the Biden administration was waiting for the EIA to give them a good reason to tap the SPR this week, they did not get one,” said Ed Moya, analyst at online trading platform OANDA.

Thus, the idea of utilizing the SPR isn’t as easy as turning the tap on or off (separately, my Investing.com colleague Geoffrey Smith has written an excellent article on this). There are so many dynamics around the whole thing, the most important being whether America is indeed in a crisis grave enough to risk the nation’s emergency crude supplies. 

What if we end up using a substantial part of the reserve and still can’t get the price down meaningfully? Or we do get the market down, only to see it shoot back even higher? The last could very well happen, given potential counter-tightening from a belligerent OPEC unwilling to squander the best chance it has of getting crude back to $100 for the first time in seven years. In order not to be pressured to pump more than it intends, OPEC even downgraded demand for its own crude in the fourth quarter - that’s how sly it can get. 

“Whatever SPR release planned by the White House might not be enough to counter further production cuts that OPEC might do in retaliation,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. 

And don’t forget that if Biden does get the market down, he still has to rebuild the U.S. reserve. At what price will we do that?

Notwithstanding all this, Kilduff says there still might be a way to make the SPR release effective - by coordinating the decision in Washington with the periodic sales China has been making of its own oil reserves to try and tamp down the market. But there has to be enough political will on Biden’s end first.

“If the U.S. teams up with China to synchronize their SPR releases - and they could, given their improving relations - then it might make a difference,” Kilduff said. “The two biggest oil importers are both suffering now from high crude prices.”

Biden’s more enduring - and effective - option might be to let Iran have that nuclear deal with the six world powers that will take U.S. sanctions off Tehran’s crude and immediately double that miserly 400,000 barrels per day OPEC has been offering the consuming countries. 

Iran will ultimately be able to bring 2 million barrels or more to the market if its previous extraction capacity hasn’t been terribly impacted by relative inactivity or damage caused to its economy from the Trump-era sanctions. 

There are, however, two major problems in getting an Iranian nuclear deal done. The first is that Tehran has, according to inspectors of the International Atomic Energy Agency, gone so far down the road of uranium enrichment and potential bomb-making that no nation wants to be responsible for rewarding the Mullahs with the financial means as well to accelerate that - and live to regret it later. The other is, of course, loss of “face” for Biden who has demanded that Iran come clean on its nuclear program before any meaningful talks begin - the exact opposite of what the Islamic Republic is suggesting: drop the sanctions and we’ll talk.

Still, the U.S.-Iran standoff - and other options Biden is exploring on controlling inflation - has bought the president some time before the oil rally probably starts resuming again.

“It seems unlikely crude prices can break above recent highs until energy traders see whatever action will come from the Biden administration,” said Moya of OANDA, But he also adds: “The oil market deficit is firmly in place and that should prevent crude from seeing a significant pullback.”

So, as crude bears take some joy at having shaken the tree-tops of the oil rally, each of the circumstances that drove the market lower in the past three weeks had their own issues.

Case in point: Inflation. 

The Labor Department reported that the US Consumer Price Index, which represents a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% during the year to October. It was the fastest growth of the so-called CPI since November 1990, an acceleration driven mostly by pump prices of fuel running at seven-year highs. 

But the University of Michigan also said in its closely-watched consumer poll released on Friday that most Americans had become accepting of high inflation as a way of life despite consumer sentiment - which accounts for 70% of the economy - falling to a decade low.

Oil Price Technicals

We are adding a technical observation on crude from this week to our review of the oil market, given the significance this has on price swings. It comes from Sunil Kumar Dixit, chief technical strategist at skcharting.com, who regularly contributes technical outlooks to commodity articles run by Investing.com.

Says Dixit of his analysis of U.S. crude’s WTI, or West Texas Intermediate, which settled at $80.79 per barrel on Friday:

The weekly candle stochastic of WTI, following its close on October 17, had reached 97, making it overbought and resulting in negative and bearish overlap.

WTI then formed a bearish price reversal top when it closed the week of October 24 at $82.97, below the previous weekly close of $84.05 on October 17. In the subsequent week to October 31, WTI settled at $81.53.

With the latest weekly close of $80.79 on November 12, the bearish streak extends to a 3rd straight week. 

This signals the beginning of 3 Black Crows, a bearish technical formation.

Hereon, the 5-week EMA of $80.87 should be monitored.

A move above $80.87 may help WTI recover to $81.82, which is 50% Fibonacci level retracement of the swing high of $85.40 and swing low $78.24.

A move under $79.77 could see WTI retest the 10-week EMA of $78.71 and previous week's low $78.24, which is major acceleration point for $77 support and the weekly middle Bollinger Band of $74.28.

Oil Price Roundup

Oil’s overextended rally certainly needed a correction and a third weekly loss seems to point toward that.

WTI settled down 80 cents, or almost 1%, at $80.79 per barrel. For the week, WTI was down 0.6%, after back-to-back losses of 2.8% and 0.2% in the previous two weeks. Still, compared to WTI’s seven-year highs above $85 in October, the deficit was just a drop in the barrel, so to speak. The U.S. crude benchmark also remains up 65% for the year.

Brent finished down 70 cents, or 1.2%, to $82.17 on the day. For the week, Brent was down 0.8%, after the back-to-back losses of 1.9% and 1.3% respectively in the previous two weeks. Brent scaled a three-year high above $86 last month and remains up 58% for the year.

Gold Market & Price Roundup

It has exceeded most gold bears’ expectations, but bullion’s true test still lies in its ability to recapture $1,900 pricing and beyond.

U.S. gold futures’ most active contract, December, settled Friday’s trade up $4.60, or 0.3%, at $1,868.50 an ounce. It earlier peaked at $1,871.35 - its highest since June 15.

The yellow metal sparkled for a second week in a row, notching a win of 2.8% this week after last week’s 1.8%. It also rose for a seventh straight day, its longest stretch in the green from the end of June to the first week of July.

“What’s happening to gold is certainly great, but to me, the price still needs to get beyond $1,900 in order to establish its true cred as an inflation hedge,” said Phillip Streible, precious metals strategist at Blue Line Futures in Chicago.

Gold last traded at $1,900 levels in June. Prior to that, during the height of the coronavirus outbreak between March and August 2020, it went from below $1,500 to record highs above $2,100 on fears about the global economy and inflation.

Bullion has always been touted as an inflation hedge. But it wasn’t able to live up to that billing earlier this year as incessant speculation that the Federal Reserve will be forced in a faster-than-expected rate hike had sent Treasury yields and the dollar rallying instead at bullion’s expense.

That trend abated after Fed Chair Jay Powell assured earlier this month that the central bank will be patient with any rate hike that will only come after the middle of 2022 and most likely toward the end of the year. 

This week’s rally in gold came as the Labor Department reported that inflation in U.S. consumer prices was running at their highest since November 1990.

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 (18)
me ish
me ish Nov 14, 2021 6:43PM ET
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Any economist worth his/her salt knows there's a 18 to 24 month time lag from injecting heroine into a financial system and the resultant inflation - you cant pump one quarter of all the USD that's ever existed, and that just been created in the last two years into an economy, without serious doses of inflation - it's not rocket science - it's basic economics - and the governments around the world know this - because inflation is what they need to inflate away their massive debts - it's the ONLY way to get out of the massive government and corporate debt spiral without default - so that's what they've deliberately done - and we know it's deliberate because all the central banks have also been stocking up on gold over the past few years as well - at least those that can afford to. So none of you believe the BS that this inflation has come as a surprise!!!
SunilKumar Dixit
SunilKumarDixit Nov 14, 2021 6:43PM ET
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me ish. Printing and pumping this enormous dollar bills in to the system comes with inflation as an essential compliment and it's an established fact that hardly surprises anyone. However, record printing and pumping of dollars strengthens the value of currency, this is a miracle.
Hiep Nguyen Quoc
Hiep Nguyen Quoc Nov 14, 2021 2:25PM ET
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Several weeks ago, the paint of gold buyer is to bear the floating loss. Nowadays, the paint is to carry the technical profit. May you remember when we talked about the good time to long gold at the night gold crash happening ^^
Tyler Hixon
Tyler Hixon Nov 14, 2021 2:07PM ET
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why is there ZERO discussion in another option is we get back to producing our own and resuming the oil pipeline?????
Barani Krishnan
Barani Krishnan Nov 14, 2021 2:07PM ET
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Shale revolt; the producer thinking of own pocketbook at these prices and afraid of share selldowns by investors, when they should be educating them about the importance of capex at these prices.
Abdul Rehman
Abdul Rehman Nov 14, 2021 12:50PM ET
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Even Afghanistan don't care about Biden If you think OPEC obeyed u r fun.cking your self
Barani Krishnan
Barani Krishnan Nov 14, 2021 12:50PM ET
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OPEC is a price *******as much as any cartel. The tailwind is on its side now, that's all. Don't give it too much cred; Just in May last year, it was virtually on its knees and needed Trump -- who was fighting it all his time in office -- to help salvage its so-called alliance with Russia. Know your facts before you argue, Abdul Rahman. Don't be blinded by your contempt for the US administration.
Barani Krishnan
Barani Krishnan Nov 14, 2021 12:50PM ET
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the word axed out by the system W .. H.. O.. R.. E
SunilKumar Dixit
SunilKumarDixit Nov 14, 2021 12:50PM ET
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Abdul Rehman. It's hardly a secret that OPEC is all about opportunism blinded by unscrupulous greed feasting on the unruly premium. As far as Biden is concerned, all personal grudges and misgivings notwithstanding, what he does and what he doesn't, does matter and the world does feel the heat of it.
Barani Krishnan
Barani Krishnan Nov 14, 2021 12:50PM ET
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SunilKumar Dixit Well said, Sunil!
Andrew Ulferts
Andrew Ulferts Nov 14, 2021 11:45AM ET
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Barani I am very impressed by this dialogue that you are participating in. In the days of fake news hit and runs, you deserve an award. I am long oil, and actually I went all in on small cap drilling stocks last fall. A little early, but I have a target date of late 2023/24. Have a great day.
Barani Krishnan
Barani Krishnan Nov 14, 2021 11:45AM ET
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Andrew, thanks much for those kind words. Indeed, it's readers like you who keep me going. Bests in the week and year ahead, mate!
Peter Cruz
Peter Cruz Nov 14, 2021 11:26AM ET
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Canada has oil but limit it because of climate change. But then oil by demand has to come out somewhere anyway. So then turn to Iran. This looks like a "SMART" move.
Barani Krishnan
Barani Krishnan Nov 14, 2021 11:25AM ET
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Author’s note: As an analyst at Investing.com, my role is to present readers with all the variables in the marketplace that I’m aware of, which could impact the price discovery for a commodity. Since I came onboard in 2018, I have strived to do this to the best of my ability, and I know this to be generally true as well with my colleagues. The commentary field below the articles we write is meant to be a feedback forum, which when used well could lead to a dynamic exchange of information between us and the visitors to Investing.com. It isn’t always possible for the writer and reader to be in agreement on something. When there is a divergence in views, the debate should stick to the merits of the article. To me, courtesy is a two-way street and my response is always commensurate with how I am approached.
Barani Krishnan
Barani Krishnan Nov 14, 2021 11:25AM ET
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Many of my colleagues do not engage in debate with their readers and often suffer undeserved abuse for the work they do. I believe a healthy exchange of ideas is important as I should be able to stand up for what I have written versus the input from the reader. I assure you: I will respond, and the response will be proportionate to your approach. It has been a pleasure serving you the past three years and I look forward to a continued relationship.
SunilKumar Dixit
SunilKumarDixit Nov 14, 2021 11:25AM ET
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Barani Krishnan sire you have been consistently adding value to the much needed knowledge base for the good of readers community and thy work has been enlightening the community through the entire gamut of articles from energy to PMs to agro and the juggernaut shall continue to roll on. Kudos for everything 🙏
Barani Krishnan
Barani Krishnan Nov 14, 2021 11:25AM ET
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SunilKumar Dixit  Thanks much, Sunil. As I told someone else here, it's the encouragement of the readers that keeps me going. I am also indebted to technical contributors like yourself for adding value to my articles.
Peter Cruz
Peter Cruz Nov 14, 2021 11:23AM ET
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China has a long term contract with Russia which give them a flat oil price.
Barani Krishnan
Barani Krishnan Nov 14, 2021 11:23AM ET
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So, "communism works", I guess? Ha ha, an interesting perspective.
Kaveh Sun
Kaveh Sun Nov 14, 2021 11:14AM ET
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There r 2 policies cause inflation: Fed n Fiscal. Both of they r throwing money out the windows at the same time now. Ofcourse when both do that at the same time, inflation is running high. If Fed loose control, Biden will implement ‘price control’ like Jimmy did.
Michael Belenky
Michael Belenky Nov 14, 2021 10:51AM ET
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Biden not in charge. He’s told whom take questions from. A puppet in the WH.
Joe Tiriolo
Joe Tiriolo Nov 14, 2021 10:51AM ET
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👍 Spot on!
 
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