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Energy & Precious Metals - Weekly Review and Outlook

CommoditiesFeb 20, 2022 07:00AM ET
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By Barani Krishnan

Investing.com -- The nonstop rally in oil has stopped after eight weeks. Or has it?

With crude’s five-minute candle flipping at every three bars this week, the nerves of traders were getting pounded beyond belief, regardless which side they were on. 

As Friday’s 5:00 pm trading halt came, many were just glad the week was over. 

Throughout the day, the texts I got from some of them invariably sounded like this: “Heck, I’m down again!” (that’s from a long who’d been banking on the drums of war over Ukraine to deliver a new $97 high) or “Damn, just can’t win this!” (that’s a bear who thought the strands emerging from the Iranian nuclear deal evolving in Vienna would just sink crude below $88).

At the end, longs won the day with Brent, pulling the market from $90 lows back to mid $93 levels. But the global crude benchmark still fell 1% on the week to snap an eight-week winning streak that proved a win for the bears. Shorts also celebrated on both ends of WTI, sending the U.S. crude benchmark down almost 1% on the day and 2% on the week.

Anyone counting on this order of play to continue when markets officially reopen after Monday’s President’s Day holiday in the U.S. is probably underestimating the gravity of the volatility that oil is being set up for. 

That’s because just after the regular trading session for crude folded on Friday, the “real news” that traders had awaited all day emerged - that the White House could indeed sanction Russia by as early as next week. 

President Biden cited sanctions five times in the text of his speech that evening, reinforcing Vladimir Putin’s conviction that Russia would be penalized even if it did not add to current hostilities. Yet, Moscow was less than forceful in denying Russian provocation of Ukrainian rebels in Donbas, as alleged by Washington. Then, there was the shelling of a Ukrainian kindergarten, which according to Biden, had all the signs of the handiwork of the Russians.

If there was still a semblance of calm over the impending U.S. actions against the Kremlin, it was due to the White House’s assurance that the first sanctions package would not yet disable Russia from accessing the SWIFT international banking system. Of all the risks pegged to the crisis, this outcome would deliver the worst financial hit to Russia, theoretically making its oil as difficult to trade as Iran’s. Given the stretched state of crude supplies in the market - both real and hyped - oil’s potential ascension to $100 a barrel or even $125 should not be disputed.

On the other end of the divide, Iran is slowly and surely working its way back into the legitimate market for oil exports with each passing day.

The draft of conditions, or rather roadmap of return, laid out to Tehran by world powers seeks to extract first from Iran compliance and proof that they have brought their nuclear enrichment to levels that would practically not harm the world anymore. Given Tehran’s earlier demands that the liftoff of sanctions on their oil not be conditional at all and that it’ll obey all rulings later, one wonders whether the draft is set up to fail from the start. 

If Iran's top nuclear negotiator, Ali Bagheri Kani, is to be taken to his word, “nothing is agreed until everything is agreed." Yet, it was also Kani who announced jubilantly this week that “we are closer than ever to an agreement”. That tweet of his that sent crude prices down almost $5 a barrel at one point last week. 

As French Foreign Minister Jean-Yves Le Drian told his parliament: "Political decisions are needed from the Iranians. Either they trigger a serious crisis in the coming days, or they accept the agreement which respects the interests of all parties. We have reached (the) tipping point now. It's not a matter of weeks; it's a matter of days" for a deal. So, an agreement could still be reached under extraordinary circumstances.”

As a sweetener to reviving the 2015 nuclear deal, world powers are also waving in Iran’s face a $7 billion carrot that actually happens to be the Islamic Republic’s own money stuck in South Korean banks under the sanctions imposed by Washington. The release of these funds is to be in exchange for the release of Western prisoners held in Iran, which U.S. lead negotiator Robert Malley has said will be a requirement.

Iran is likely to agree to this cash-for-prisoners exchange as the money would be extremely helpful for its immediate economic needs (detractors would argue that the cash would further enable the Islamic Republic to act against Israel and Western interests). But we could also look at Iran reinvesting a significant portion of the money towards rebuilding its oil industry. This would help it bulk up production beyond current capacity and challenge others within OPEC and the extended OPEC+ for more market share. More barrels from Iran would mean more downward pressure on crude prices.

To recap from the past few weeks, the risks to oil from Iran’s side includes the potential return of one million barrels daily or more to the market (this estimate remains contentious); the unlocking of an estimated 12 million to 14 million barrels of Iranian crude held as “bonded storage” in Chinese ports; and price undercutting on mainly Saudi oil for Tehran to quickly win market share. 

As worrying as all this may be to the “higher for longer” price dream of oil bulls, a Reuters story from last week surreptitiously said that OPEC+ will work to incorporate Iran into its strategy quickly - an acknowledgment of how a hungry and competitive oil exporter with barrels to sell could upset the alliance’s strategy of squeezing production to create artificial supply shortages.

As I wrote earlier this week, the Iran and Russian risks are such polar opposites to oil - with the first representing a bear case (more barrels eventually from Tehran) and the second a bull case (U.S. sanctions on Russian energy exports in the event of an invasion) - that it pays to examine the permutations in each. 

In my years of reporting and analyzing about oil, rarely have two divergent themes coexisted this closely in shaping the narrative and pricing for crude. 

Oil Prices & Technical Outlook

London-traded Brent, the global benchmark for oil, settled up 57 cents, or 0.6%, at $93.54 a barrel.  For the week, Brent fell 1% for its first weekly decline, following seven weeks of gains that added some 27% to the global crude benchmark.

New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled down 69 cents, or 0.8%, at $91.07. For the week, WTI fell around 2%, its first weekly drop after a seven-week rally that netted the U.S. crude benchmark 31% in gains.

Sunil Kumar Dixit, chief technical strategist at skcharting.com, said WTI could retest $95.80 and visit much touted $100 and $106.80 levels in the coming week or even drop below $89 - such is the range for a market being pulled at all corners after a two-month long rally that appears at exhaustion point.

“For sure, we’ve seen a break in the eight-week long winning streak. With that,  WTI has formed a potentially bearish price reversal top at $95.80 with a weekly closing at $91.80 and support at the 5-week Exponential Moving Average of $89.80 and the tested low of $89.”

Dixit added that WTI’s stochastic reading of 88/92 makes for a negative crossover while its Relative Strength Indicator reading of 67 has started pointing downward, indicating possibilities of a further correction if prices break below $89.

“Outlook for the week ahead is a tad bearish with mixed reactions between the $95.80 resistance and $89 support. Reactions to the 50% and 61.8% retracements of $92.40 and $93.20 will be monitored closely by bears for an opportunity. A retest and failure to consolidate above this zone may extend the correction to $84.80 followed by $78 over an extended period of time. But if prices consolidate above this area, oil is likely to retest 95.80 and visit much touted $100 and $106.80.”

Gold Price & Market Activity

Gold prices dipped on Friday but finished up for a third week in a row, with the biggest weekly gain in three months, as a combination of geopolitical concerns over the Russia-Ukraine conflict and soaring U.S. inflation drove a horde of safe-haven buyers into the yellow metal.

Gold’s most active contract on New York’s Comex, April, slipped $2,.20 to settle Friday’s trade down 0.1% at $1,899.80 an ounce ahead of the long weekend break leading into Monday’s market holiday for the US President’s Day.

For the week, the benchmark gold futures contract rose 3.1%, its most for a week since November.

Earlier on Friday, it hit an intraday peak of $1,905, marking an eight-month high with June being the last time when gold got to $1,900 levels.

“Gold prices have had quite a February and should find key resistance around the $1,930 level,” said Ed Moya, analyst at online trading platform OANDA.  “With Monday being a holiday in the U.S. that might hold if Ukraine tensions do not escalate further.” 

“In just a couple of months, investors have done an about-face with gold,” added Moya. “Wall Street has gone from expecting robust economic growth around 4% this year and a return to normal next year, to fears that aggressive Fed tightening could invert the curve next year and send this economy into a recession early in 2024.”

The U.S. economy grew by 5.7 percent in 2021, its fastest since 1984, from a 3.5% contraction in 2020 caused by the coronavirus pandemic. 

But inflation grew even faster, with the Consumer Price Index expanding 7.0% in the year to December, its most since 1982. 

The Federal Reserve’s preferred inflation tool, the Personal Consumption Expenditures Price Index, which excludes volatile food and energy prices, expanded by 5.8% in the year to January. 

The Fed slashed interest rates to almost zero after the outbreak of the coronavirus pandemic in March 2020.  It is expected to resort to a series of rate hikes this year to counter inflation. 

Gold Technical Outlook

According to skcharting’s Dixit, gold appears largely on an upward momentum that could take it as high as $1,975 in the midterm.

Dixit noted that gold recorded its third positive week after strong momentum triggered by fears of the Russia-Ukraine conflict, breaching $1,900 for a $1,902 high and completing a $58 jump before settling the week at $1,897, slightly below $1,900.

“Stochastics, RSI and MACD are all positioned for a bigger rally while some healthy corrections can hardly be ruled out,” said Dixit. “As for the week ahead, prices will largely be driven by geopolitical developments which may continue making gold trades choppy and volatile.”

Dixit said short-term support was seen at $1,890-$1,886 while upside momentum could gain affirmation at above $1,902, targeting the subsequent levels of $1,916-$1,920 and $1,950-$1,975.

“The caveat though is that if gold breaks down and sustains a move below $1,890-$1,886, it will push it to $1,874 - a critical level that could trigger a further downside of $1,860 to $1,825.”


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 (6)
SunilKumar Dixit
SunilKumarDixit Feb 20, 2022 3:31PM ET
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History bears witness that soon after a parabolic rise, Oil has fallen even harder. It's only after the great decline that bulls realize the risk premium.
Barani Krishnan
Barani Krishnan Feb 20, 2022 3:31PM ET
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True, Sunil. Time will tell again on this one.
SunilKumar Dixit
SunilKumarDixit Feb 20, 2022 11:05AM ET
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Geo Political uncertainties, record inflation numbers, mounting debts, fragile growth, Gold price Breakout has a message.
Mohd Izhar Muslim
Mohd Izhar Muslim Feb 20, 2022 11:02AM ET
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Thanks 👍
Todd Gray
Todd Gray Feb 20, 2022 10:30AM ET
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As always, US actions do the greatest harm to the working people (who actually hold up the entire economic system), by forcing them to pay higher prices for the imported energy they consume. The US of Don Quixote rides to the rescue.
SunilKumar Dixit
SunilKumarDixit Feb 20, 2022 9:31AM ET
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Markets await holding its breath for news from ground zero.
Kochar Bipin
Kochar Bipin Feb 20, 2022 8:30AM ET
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Biden has done an exceptional job in pushing up inflation over 7% by converting the Ukraine crisis into a major geo-political by preventing it being addressed thru the Normandy format -
Barani Krishnan
Barani Krishnan Feb 20, 2022 8:30AM ET
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His attempt to speed up the green transition in energy certainly laid the early foundation to the inflation in oil, though the supply chain bottlenecks that followed were a global problem. Just look at what Europe is going through. Depending on your political stripes, Biden is an easy target if you're looking to vent. I'm not making any apologies for him but at the same time, I'm not going to throw the entire kitchen sink at him.
 
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