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Energy & Precious Metals - Weekly Review and Outlook

CommoditiesFeb 06, 2022 06:52AM ET
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By Barani Krishnan

Investing.com -- The Fear and Greed Index measures investor sentiment in stocks, bonds and cryptocurrencies with a 0-100 reading, where 0 is the state of extreme fear causing extreme selling pressure while 100 suggests extreme buying or extreme greed. In commodities though, supply constraints and geopolitics can cause fear and greed to intertwine, meaning fear that something’s scarce can make investors extremely greedy in buying it — like with oil now.

The unhinged oil rally of the past two months had everything going for it, from geopolitics to supply politics. The only thing missing was a real weather crisis. That was made up this past week by fears of a Texas freeze that tipped the market firmly above $90 on the notion that the Permian oil-and-gas basin could get frozen again like last year.

U.S. crude’s WTI benchmark as well as its U.K. peer Brent rallied for a seventh straight week, racing toward Wall Street banks’ call for $100 a barrel. To be sure, that target was made well before the Russia-Ukraine crisis, half-hearted production hikes by OPEC+ and the arctic blast that gripped much of America earlier this past week, including Texas — typically the fourth hottest U.S. state when it isn’t winter.

The oil rally gained new impetus this week as temperatures in Texas were initially forecast to dip to below 20 Fahrenheit (-7 Celsius).

West of Texas is home to the Permian oil and gas basin which spills over into New Mexico’s southeast.

“The relative strength of the cold in mid-Texas cannot be understated - consecutive days of freezing temperatures within this week have the potential to lead to additional freeze offs in the Permian,” Dan Myers, analyst at Houston-based energy consultancy Gelber & Associates, said on Wednesday.

But weather forecasts are just that — forecasts. Readings on something as fickle as temperature should always be taken with more than a few grains of salt, especially when they are made well in advance.

In the case of Texas, forecasts from early in the week had Midland, which sits at the heart of the Permian, averaging a low of 11 Fahrenheit by Sunday, Houston 28F Dallas 18F. 

But as I sat to write this at pre-dawn Sunday, Midland’s low was projected at just 23 Fahrenheit with an intraday high of 53 by late afternoon; Houston was seen at 29-57F and Dallas was forecast at 28-50F.  

The stakes of another super freeze are high in Texas, where last year’s winter storm led to blackouts and deaths of more than 200 people. 

But Texas had begun thawing from the worst of the week’s cold by Thursday, and as crude oil futures opened Friday’s session in Asia, it was clear the Permian wasn’t in such bad trouble, said some traders who spoke to Investing.com on Saturday after closely following the weather there all week.

Utility officials in Texas are also confident the Lone Star State’s power grid will avoid a repeat of last year’s blackouts from storms sweeping through the region. Since the 2021 catastrophe, new rules have been put in place requiring grid operators to increase reserve capacity and make it easier for industrial users to get paid to reduce consumption. 

The traders who spoke to Investing.com on Saturday also pointed out that natural gas — a commodity used for heating and cooling and as important as oil during the peak of winter and heating — plunged 18% between Thursday and Friday, giving back all of Tuesday’s 16% rally, after it became apparent that the fear factor over the Permian had been overplayed. 

If anything, gas supplies were at a greater risk of being run down in the near term than oil, with the five-year average for storage nearly 15% below where it stood a year ago, the traders said.

Still, the current buying mania in oil has edged out any rationality, they said, reducing it to a race where both rider and horse — i.e. trader and market — were wearing blinkers in the dash toward $100.

“Crude prices seem to have a one-way ticket to $100 oil,” Ed Moya, analyst at online trading platform OANDA, wrote in his weekend commentary. “Everything seems to be turning very bullish for WTI crude and the bullish momentum might not see much resistance until the $95 level.”

As I said at the outset, with commodities, supply constraints and geopolitics can cause fear and greed to intertwine, and that’s what’s happening with oil now. Last week, the height of the fear-greed focus in oil was on the Russia-Ukraine conflict, which has contributed at least $10 of the premium in a barrel of WTI and Brent over the past month — despite not a missile fired yet by either side in the conflict. 

As if the exuberance in oil buying wasn’t enough, some markets commentators, including CNBC’s “Power Lunch” co-host Kelly Evans, wondered aloud on Twitter this week why pension funds were divesting — instead of going long — on energy and recycling their constituents' own dollars back into their own future pensions payments.

Well, perhaps their decision has to do with long-term foresight on the economy as well as morals (the last of which has, unfortunately, has become a dirty word in investing).

As I said in my previous week’s column, oil  is the commodity that literally powers and moves the planet. Oil is indispensable to the earth’s mobility. It is the underlying commodity in almost every commercial activity. Higher prices of oil lead to higher prices of food, gas, clothing and nearly every essential. 

Thus, it makes me laugh when people say they are buying oil as a hedge against inflation because nothing could be further from the truth. Using gold as an inflation hedge doesn’t contribute to inflation. But it’s a different story with oil.

It’s disingenuous to say you’re hedging against inflation by buying oil when your purchase is actually helping drive up the price of that oil. Call it a money-making opportunity in a bull market, which is exactly what it is. Just don’t use the bull that it’s an inflation hedge.

While we are a pro-investing website, Investing.com sometimes balances its markets’ coverage with commentaries on the social impacts of investors’ actions, especially when those actions could be destructive to the global economy as a whole. And that’s exactly where we are with oil prices threatening to blow well past $100 a barrel, especially when world economic recovery from Covid is still at a fledgling phase. History is full of examples of hyper-inflation and stagflation, whose seeds were planted by high oil prices. 

While we apportion blame to the Biden administration’s short-sighted energy policies (anyone with common sense would have had a renewables plan working vigorously alongside with that of fossils before a transition is made), we must also ask ourselves if FOMO (Fear Of Missing Out) from a rally — or rather RNTMO (Right Not To Miss Out) — is more important than the economy we earn our keep from. 

Remember that the seeds for the financial crisis were sown by some of the same Wall Street banks calling for $100 oil today, as much as the Bush administration was to blame for its role in mismanaging the economy. While that collapse was triggered by subprime mortgages, oil at nearly $150 a barrel was a catalyst too.

Oil Prices & Technical Outlook

New York-traded WTI, or West Texas Intermediate, settled up $2.04, or 2.3%, at $92.31 per barrel, after a session high at $93.17. Week-to-date, the U.S. crude benchmark was up nearly 7% while the cumulative gain for the seven weeks running was 30%. This year alone, WTI has risen some 23%. 

London-traded Brent, the global benchmark for oil, settled up $2.16, or 2.4%, at $93.27, after a new eight-year peak at $93.69. Week-to-date, Brent was up about 4% while its cumulative advance over seven weeks was 27%. Year-to-date, Brent has gained 20%. 

Sunil Kumar Dixit, chief technical strategist at skcharting.com, says his view is that the fundamental triggers for WTI have been “overreacted on, well above acceptable elasticity.”

“Short term upside likely to remain capped at $95, whilst breaking below $86 should be the first sign of exhaustion, as the weekly chart is clearly sending overstretched signs and parabolic ascent, after seven weeks in a row of rallying.”

“A bearish reversal top will most likely form if the $86 handle gives further way to the south.” 

But Dixit concedes that WTI could have a little more upside to push toward $95 even with news of the Russia-Ukraine conflict calming 

“Though the stochastic reading at 94 and RSI at 70 on the weekly chart are at overbought territory, some limited upside to $95 is possible. But on the whole, a technical correction seems more likely than not.”

Gold Price & Market Activity

Two steps forward and one behind — gold’s measured dance on its return to $1,800 pricing continued this week as it survived the onslaught of a powerful U.S. jobs report for January, although it could not advance strongly enough to excite longs in the market.

Gold futures’ most active contract on New York’s Comex, April, settled up $3.70, or 0.2%, at $1,807.80 an ounce. For the week, it rose 1.3%. 

While a weekly gain north of 1% isn’t bad for any market, in gold’s case it’s a painful reminder to bulls in the market of how underplayed the commodity is as an inflation hedge, when key price indicators in the U.S. are all pointing at 40-year highs.

“The $1,800 level is key for gold and if gold can continue to hover around it, that would be very positive for bullion bulls,” Ed Moya, analyst at online trading platform OANDA, wrote in his weekly commentary.

“If gold breaks below $1,780, conditions could get treacherous and prices could see significant momentum-selling targets towards $1,700.”

Gold longs briefly had a panic moment on Friday morning when gold broke below that $1,800 level, although it never really got far — reaching a session bottom of $1,792.20. Given the circumstances of the jobs report, that was actually pretty impressive on gold’s part.

U.S. employers added 467,000 jobs in January, beating economists’ expectations, although the jobless rate moved up fractionally to 4% from a previous 3.9%, the Labor Department said in its non-farm payrolls report. Economists tracked by Investing.com had forecast a jobs growth of around 150,000 for last month versus December’s 199,000.

Following the jobs report, fed funds futures suggested there could be as many as five interest rate hikes this year as the extraordinary labor market conditions create a solid base for the Federal Reserve to fight inflation.

“The US jobs report has the market now pricing in a greater than 50% chance that the Fed will hike five times in 2022,” economist Greg Michalowski said in a post on the ForexLive financial media platform. “Expectations for March and May hike are now at 100%. There is an 82% chance of a June hike and a 56% chance of a July and November hike.”

The quantum for each hike remains at 25 basis points. Rates are currently at between zero and 0.25%, and the five hikes could bring them to a range of 1.25-1.50% although some hikes could be more than 25 basis points, depending on the performance of the labor market, the economy and, ultimately, inflation.

After staggering unemployment triggered by the Covid-19 outbreak in 2020, the labor market has picked up dynamically, showing a jobless rate of just 4.0% in the January non-farm payrolls report released on Friday — versus a record high of 14.8% in April 2020. An unemployment rate of 4.0% or lower is considered as “maximum employment” by the Fed, which has a dual mandate of growing jobs and keeping inflation under control primarily through interest rate controls.

Since slashing rates to nearly zero in March 2020, the Fed has provided stimulus of more than $2 trillion over the past 20 months to sustain credit markets. On top of that, the federal government spent trillions of dollars more on pandemic relief measures, while employers paid out higher wages to working Americans.

All that money, along with supply chain bottlenecks arising from the pandemic, have created soaring inflation as the economy grew 5.8% last year from a 3.5% contraction in 2020. The US Consumer Price Index, a key barometer for inflation, jumped 7% in the year to December, growing at its fastest since 1982. The Fed’s own tolerance for inflation is a mere 2% a year.

Gold Technical Outlook

SK Charting’s Dixit noted that gold managed to keep its head above water this week, post the dreadful $73 drop from the $1,853 high that pushed the metal down to $1,780.

“Gold's further move into next week will be closely monitored by price reaction to the $1,785 low and the rebound to $1,797, which is a 50% Fibonacci level.”

“Breaking and sustaining below $1,785 will invalidate the recovery and extend the selling to test the lower Fibonacci level of 61.8% at $1,768.”

Following the U.S. jobs report, expectations had been heavy for gold to correct from $1,800 to $1,797 and even test $1,790, said Dixit.

“Gold, in fact, surprised by rebounding to above $1,800. If it succeeds holding above $1,785 in any volatility that comes this week, then the rebound could extend to $,1825, a level which is critical for further upside."

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

Energy & Precious Metals - Weekly Review and Outlook
 

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Comments (14)
Abhay Agrawal
Abhay Agrawal Feb 07, 2022 5:33AM ET
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excellent as always sir
JongUn Kim
JongUn_Kim Feb 06, 2022 2:10PM ET
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Im down for silver
DC Money
DC Money Feb 06, 2022 2:09PM ET
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oil will drip just need to beak $85 and the waterfall will take it to $65 fair value. The world is ready to take on Russia and China after Feb 20th. Global indexes will correct -30% and the US -15% to -20% with USD rallying to all time highs. Rouble will be valued at ZERO and Russia will be bankrupt
SunilKumar Dixit
SunilKumarDixit Feb 06, 2022 2:09PM ET
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DC Money. You are on a right page about Oil. Could you please consider mentioning the ever mounting and record debt the US has piled up and how will they service the debt... By printing another ten trillions or so... before Russia goes bankrupt.
Ying Yu
Ying Yu Feb 06, 2022 12:42PM ET
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Let's see tomorrow. You can see what happened last May 19 when US try to stop sanctions. Biden administration want to crash oil price to limit inflation. Otherwise, Democrats will loss the middle election.
Chad RicherThanYou
Chad RicherThanYou Feb 06, 2022 10:48AM ET
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$150 a barrel oil by April. $200 a barrel by July
Barani Krishnan
Barani Krishnan Feb 06, 2022 10:48AM ET
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Followed by another financial crisis, if not demand destruction. Yes, exactly what the world needs, while the oil bulls make their fortunes.
Miriam Morkhul
Miriam Morkhul Feb 06, 2022 10:48AM ET
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Yes, the big shift from momentum to value. The big question is, why are governments opposed to uranium fuel for base load power? It's the most economic and clean alternative to oil.
Tom Sc
Tom Sc Feb 06, 2022 10:15AM ET
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Barani, any idea why the FED balance sheet is growing at the same pace as it has the last year despite "tapering"? tapering was supposed to start in November but balance sheet growth still well over 100 billion in January.
Barani Krishnan
Barani Krishnan Feb 06, 2022 10:15AM ET
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I think some backdoor support programs still exist and probably making up for that headline haircut of $30 billion monthly. I think we will only start to seriously witness a paring of the balance sheet number when they put a target to it. For now, everyone seems to be consumed with March and the tightening calendar for the rest of 22.
Tom Sc
Tom Sc Feb 06, 2022 10:15AM ET
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ya so more lies from the Fed basically, for all the tough talk they have continued to expand the balance sheet at the same pace and not raise rates yet. Zero has actually changed. but if rates are climbing this quickly despite continued expansion it makes you wonder what happen when they actually slow down...let alone allow for run off. like I always say, watch what these snakes do not what they say.
Aditya Subramanyam
Aditya Subramanyam Feb 06, 2022 8:13AM ET
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What about oil ?
Barani Krishnan
Barani Krishnan Feb 06, 2022 8:13AM ET
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Really, what about oil? I have almost 1,500 words above on oil. You tell me what else it needs, sir.
Laila Asfoura
Laila Asfoura Feb 06, 2022 8:12AM ET
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What about silver ?
Barani Krishnan
Barani Krishnan Feb 06, 2022 8:12AM ET
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This column focuses on the big two of in the energy and precious spaces -- i.e. oil and gold.
Miriam Morkhul
Miriam Morkhul Feb 06, 2022 8:12AM ET
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Silver is in backwardation, not enough supply to meet demand. Premiums are increased for this reason. Silver miners risk going out of business if the bid for their products is not increased.
Amie Inconnue
Amie Inconnue Feb 06, 2022 8:09AM ET
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Thank you, Barani, for a well-balanced review - as always!
Aman Kashyap
Aman Kashyap Feb 06, 2022 8:09AM ET
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can you explain me the news shortly
Barani Krishnan
Barani Krishnan Feb 06, 2022 8:09AM ET
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Aman Kashyap  This isn't news. This is a review of the entire week that was and a throw forward to what's coming. There's plenty of short market reports that you can Google for oil news.
Andrew Ulferts
Andrew Ulferts Feb 06, 2022 7:45AM ET
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We all know oil prices will go much higher than this. Some of us knew this in 2020, and we will make a once in a lifetime windfall because of it. The greed of the green agenda that attempted to crush the oil industry is at fault for this 100%. The panic is palpable, and delicious.
SunilKumar Dixit
SunilKumarDixit Feb 06, 2022 7:45AM ET
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Andrew Ulferts. Prices are supreme. Prices don't lie. Trend is obviously bullish. Totally agree. However, oil above $50 - $60 doesn't help economy and oil as high as $90 or $100 is certainly a bad news adding fuel to inflation already at record high. The panic is palpable, however, far from delicious.
Barani Krishnan
Barani Krishnan Feb 06, 2022 7:45AM ET
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Sunil, Andrew has become a dear friend from my engagements with him on the energy feedback columns. Unlike most oil bulls, he has the patience to listen to negative news and respond intelligently. But he also likes pushing my buttons occasionally, like today (ha ha)
Barani Krishnan
Barani Krishnan Feb 06, 2022 7:45AM ET
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Andrew, the green energy agenda has been around for some time and been waiting for its moment. We thought 2017 was the year, when EVs made an impact like never before. But the oil lobby -- which is more powerful than any lobby in the world -- got together and ensured that the revs of EVs stayed as just that: revs that never became enduring speed. Groups backed by industry giants like Exxon Mobil and the Koch empire waged state-by-state, multimillion-dollar battle to squelch utilities’ plans to build charging stations across the country (there are state filings on these). To me, any revolution has its time and should not be scorned. The joy in any country that defeats political hegemony is palpable (using your own words) and that's what the green industry felt like in 2017-2019 and after Biden's win in November 2020. The EV revolution will be as big as (or probably bigger than) shale's when it finally arrives. It's a matter of getting the battery tech right and democratizing ownership.
Barani Krishnan
Barani Krishnan Feb 06, 2022 7:45AM ET
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But I concede Andrew that Biden should have thought this out more carefully. To be fair, he wasn't the only Western world leader who began writing off fossils too quickly -- Deutschland is just as guilty -- with pushing for the transition too quickly without having enough renewables on tap. The executive strike that was signed in January last year should have been one exercising a 300% mark up on Iranian surveillance in exchange for a deal that would be monitored on a month-by-month basis -- not a strikeout of Keystone.
Andrew Ulferts
Andrew Ulferts Feb 06, 2022 7:45AM ET
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Barani Krishnan Indeed. I actually just drove my first Tesla yesterday- WOW! What a machine. That is my next investment after I see this one through. I won’t buy an electric vehicle until infrastucture makes that realistic, but I will invest in the company. Once the semis hit the market and infrastructure matures, game over for oil profits. Have a good evening sir.
 
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