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Energy & Precious Metals - Weekly Review and Outlook

CommoditiesMar 20, 2022 06:08AM ET
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By Barani Krishnan

Investing.com -- Is demand destruction setting in for oil at above $100 a barrel?

It’s a question that’s been asked since oil hit 2008 highs, and it heightened as we got to just above $130 on U.S. crude during the first week of March, while Brent stopped at just under $140.

Then as both benchmarks plunged to below $100 in last week’s trade, the question sounded almost like a self-fulfilling prophecy: Is demand destruction already happening in oil?

The probable answer is yes; but not to the extent yet that it can stay below $100 for long.

Anyone trading energy will know no matter the alternative or justification, finding enough barrels to make up for shut-in Russian exports - conservatively estimated at three million barrels per day - will be hard. 

The Paris-based International Energy Agency, or IEA, which made that estimate, adds: “The implications of a potential loss of Russian oil exports to global markets cannot be understated.”

Yet, oil prices might still fall from demand destruction as gasoline at record highs of above $4 a gallon at U.S pumps discourages drivers in the world’s largest consuming country from filling up their tanks as often as a year ago, when regular automobile fuel was at around $2.50 a gallon.

In that vein, the IEA, which mainly looks after the interests of Western oil importers, suggested this week that the onus might be on consumers and businesses to bring about a shift in consumption - like in the Covid-lockdown era - to bring crude prices down.

“Reducing oil demand does not depend only on governments but also citizens and corporations,” Fatih Birol, executive director at the IEA, said. “Measures that they should take would include lowering speed limits, making people work from home, more public transportation and urban car-free days.”

Such measures could quickly cut oil demand by 2.7 million barrels a day, Birol said.

"The world does not have enough spare capacity, the world doesn't have enough crude either," Mike Muller, head of Vitol Asia, told an energy markets podcast on March 6. "The law of high prices is going to have to weed out the weaker demand and destroy it."

Global oil demand stands at around 100.6 million barrels daily, with analysts estimating current shortfall at around 3.0 to 5.0 million per day, inclusive of Russia’s shut-in.

Armaan Ashraf, a senior analyst at FGE, adds that the situation was “very foggy” for cracker operations in Asia. It’s a “big risk” to buy naphtha when crude is at $130 a barrel, Ashraf said, adding that profit margins are going to stay poor for at least a month. 

Ehsan Khoman, head of emerging markets research at Mitsubishi UFJ Financial Group, had a similar view.  "Oil prices have become so disconnected from the marginal cost of supply - given the extreme shortage of oil - that they are marching to the level where demand destruction becomes prevalent," said Khoman.  

But it also cannot be refuted that as long as the Russia-Ukraine conflict rages, keeping the market at below $100 will be tough.

Case in point: U.S. crude plumbing $94 lows last week and Brent around $96 on initial optimism over peace talks, before spiking back to above $106 and $109, respectively, on evidence those hopes were overrated. 

“I’m concerned that we don’t have enough oil at all here, and we need to go to $120 to $150 [per barrel], and then we get into economic destruction,” Paul Sankey of Sankey Research told CNBC. 

“There’s a major, physical, immediate outage that caught an already tight market with very low inventories,” he added.

Khoman of Mitsubishi UFJ , who expressed concerns about demand destruction, also said it could not be disputed that the Russia-Ukraine crisis “turbocharges today's extreme supply shortages."

Oil: Weekly Close & Technical Outlook

Oil prices closed Friday’s trade higher but still ended down for a second straight week.

U.S. crude’s West Texas Intermediate, or WTI, benchmark settled up $2.01, or 1.9%, at $104.99 a barrel. For the week, WTI was down 4.2%, after the previous week’s decline of 5.5%.

London-traded Brent, the global benchmark for oil, settled up $1.32, or 1.2%, at $107.96. Brent fell below $97 on Wednesday, compared with a March 7 high of $139.13. Like WTI, it was down 4.2% on the week, following through with the previous week’s drop of 4.6%.

Sunil Kumar Dixit, chief technical strategist at skcharting.com, said his analysis of WTI showed a market technically in a bearish state. 

“The outlook for the week ahead is broadly bearish with a potential for short-term recovery in prices,” said Dixit.

He noted that WTI’s weekly stochastic at 60/75 was bearish, with a negative crossover and RSI at 67 pointing south.

“A trade below the 5-week Exponential Moving Average of $103 may push WTI down to between $100 and $95. If it gets to $93, that will be an acceleration point to further downside, to the weekly middle Bollinger Band of $85,” said Dixit.

On the flip side, he said, if oil traded above $109.33, it could reach $111.50.

“Breaking and sustaining above $109.33 is essential to reach $111.50 and eventually $116,” he added.

Gold: Market Activity 

Who will win - the ambitious Fed or the inflation monster? 

The uncertainty pushed gold down for a second straight week, to its biggest weekly decline in percentage terms, since November.

Still, pressure prices combined with concerns about fallout from the Russia-Ukraine war played up gold’s dual economic-political hedge to bring it back above the $1,900 support it briefly broke earlier in the week.

The most-active gold futures contract on New York’s Comex, April, settled down $21.65, or 1.1%, at $1,921.55 an ounce. For the week, the benchmark gold futures contract lost 2.8%, its most since the week to Nov. 19, 2021.

The Federal Reserve approved this week a 25-basis point increase at its March 15-16 meeting, its first increase since the outbreak of the COVID-19 crisis in March 2020. The central bank also cautioned that there could be as many as six more rate hikes this year, based on the number of calendar meetings for its policy-making Federal Open Market Committee, or FOMC.

Following through with the Wednesday rate decision, Fed Governor Christopher Waller - one of the more hawkish members of the FOMC - said U.S. economic data is “screaming” for bigger half percentage point rate hikes in coming months to stamp out inflation.

Waller’s comments, along with similar hawkish messages from other Fed representatives, helped the dollar rebound Friday, thumbing down commodities denominated in the currency, including gold. The dollar fell more than 1% in the past two sessions combined as currency dealers reacted with disappointment to the Fed’s modest rate hike on Wednesday.

“The dollar is seeing massive inflows and that is short-term troubling for commodities,” said Ed Moya, analyst for Europe at online trading platform OANDA. “The dollar will benefit from a rapidly improving interest rate differential and steady safe-haven flows as investors (become) worrisome over the war in Ukraine's impact on inflation and ultimately growth.”

Fed Chairman Jerome Powell reiterated after this week’s rate increase that the central bank will be “nimble” as it tries to balance the fastest economic growth in nearly four decades with inflation, also growing at its most frenetic pace in 40 years. U.S. gross domestic product was up 5.7% last year after a 3.5% contraction in 2020, growing at its most since 1984. Inflation, measured by the Consumer Price Index, or CPI,  expanded by 5.8% in 2021, its most since 1982. 

The Fed has two mandates: Aiming for “maximum” employment among Americans with a jobless rate of 4% or below, and keeping inflation at 2% or below a year. It has achieved stellar success with its first target, by bringing unemployment down to 3.8% in February from a pandemic- and record high of 14.8% in April 2020.  But its track record has been miserable on the second, with CPI growing by 7.9% during the year to February, even faster than December's 7.0%.

Waller, who has consistently pushed for tighter monetary policy and higher fiscal discipline to tame inflation, said the risks from the Ukraine war led him to support more dovish colleagues on the FOMC in voting for a subdued rate hike at the March meeting.

But he said he might push for a series of 50-basis point increases at coming FOMC meetings to "front load" a tighter policy that would have a greater impact in tamping down inflation.

"Going forward that will be an issue - about going 50 - in the next couple of meetings,” Waller said, anticipating resistance from other FOMC members. “But the data is suggesting we move in that direction. I really favor frontloading our rate hikes. (Let’s) just do it, rather than just promise it.”

Most Fed officials see rates rising to around 1.9% by the end of 2022, if the FOMC keeps to 25-basis point hikes at its next six meetings.

Waller did not specify where he would like the bank’s rate to be by the end of the year. But CNBC said he appeared to be targeting a 2.0-2.25% level based on his push for a mix of 25 - and 50 - basis point hikes.

In projections issued at this week’s FOMC meeting, three policymakers projected rates should end the year at 2.375%, while one projected a closing rate of 2.625%. The most aggressive of them, St. Louis Fed president James Bullard  - who also happens to be Waller’s former supervisor - said rates should end the year at 3.125%.

Gold: Technical Outlook

Dixit of skcharting.com said after the previous week’s rejection at $2,070, April gold witnessed a bearish pin bar candle that led to the correction through $1,895 before settling at $1,921.

The weekly stochastic of 60/75 had a negative crossover with RSI 59 points south, all ingredients for a continuation of the downside if prices fail to break above $1,960-$1,985.

“Weakness below $1,920 may push gold down to $1,907, below which bears may gain extra strength causing more dents to the metal and $1,895 can give way, exposing $1,845-$1,820 over the upcoming week,” said Dixit.

Technicals aside, gold’s volatility comes largely from the war in Ukraine, which can continue to cause dramatic and wild swings, he said.

“Consistent buying above $1,920-$1,960 will be closely monitored by traders as any further acceleration on the war front can take gold back up to $2,010 and $2,070 in a short spell.”

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

 

Energy & Precious Metals - Weekly Review and Outlook
 

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Comments (15)
NLP NLP
NLP1 Mar 20, 2022 8:26PM ET
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Mr. Krishnan, just an excellent article. I commend you on engaging the readers and providing a forum with intellectual dialogue. Here’s an interesting notion. https://www.longtermtrends.net/oil-gold-ratio/ This page shows the historical relationship between gold and oil in terms of mutual value. If you look at the more present days values, the interpretation that jumps out is that either oil price must increase or relatively, gold’s must decrease in order to align with more historical standards. We live in fascinating times.
Amit Singh
Amit Singh Mar 20, 2022 5:08PM ET
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which way gold will head today
Mark McMillan
Mark McMillan Mar 20, 2022 4:56PM ET
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So many factors that influence oil cost. Currently I believe it may be wishful thinking to see it drop all that much. Global instability and fears have driven up the cost. So many are starting to distrust governments. Mainstream media pushing narratives that are false and tag misinformation on anyone who questions them. The age of information has its good and bad while leaving us struggling to see truths. I am optimistic that things will get better though through unity of the human race. United we conquer and divided we fall has never been a mire accurate statement.
Mark McMillan
Mark McMillan Mar 20, 2022 4:56PM ET
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"Oil will surge to $120 and stay high for more than a year as Russian supply dwindles, Morgan Stanley's commodities chief says"
jibodu moyo
jibodu moyo Mar 20, 2022 2:53PM ET
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gold is going bearish to 1,845
Dave Jones
Dave Jones Mar 20, 2022 2:47PM ET
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Price discovery needs to go back to the real physical markets and not just a few guys clicking buttons at criminal organizations like Deutsche Bank.
jason xu
jason xu Mar 20, 2022 9:56AM ET
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Investing.com -- Is demand destruction setting in for oil at above $100 a barrel?
Andrew Ulferts
Andrew Ulferts Mar 20, 2022 9:40AM ET
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Here comes my energy crisis.
Barani Krishnan
Barani Krishnan Mar 20, 2022 9:40AM ET
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It's been here for a while, Andrew. What we haven't noticed yet is the power of consumers, who will ultimately decide how much they can pay for a barrel, or gallon at the pump.
SunilKumar Dixit
SunilKumarDixit Mar 20, 2022 9:40AM ET
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Time when demand negotiates the price
Andrew Ulferts
Andrew Ulferts Mar 20, 2022 9:40AM ET
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Barani Krishnan I think I’d like it to stay lower. I’m in drilling stocks, so I am more concerned with volume that comes from Texas. Price per barrel helps day rates, but a recession won’t help anyone. Good day sir.
Barani Krishnan
Barani Krishnan Mar 20, 2022 9:40AM ET
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Andrew Ulferts  Thanks for the input, Andrew. You have a good one too, mate!
Jack Peterson
Jack Peterson Mar 20, 2022 9:35AM ET
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The world is at a tipping point on many different levels, but what we do know is that all the financial instruments cannot be at all-time highs or elevated at the same time. Stocks, commodities, real estate, crypto, etc are all elevated by the the collective Central Bank stimulus over the last 14 years (since 2008 crash) cheap money for that long has created numerous problem areas that now must be addressed. Of course inflation is finally running rampant, and of course the Central Banks are now backed into a corner to raise rates.. this “soft landing” will not be so soft. We all need to be prepared for the next surprise.. good luck everyone
Barani Krishnan
Barani Krishnan Mar 20, 2022 9:35AM ET
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Totally agree with your thesis, Peter. The consumer is ultimately more powerful than the Fed Chair or Saudi Crown Prince in price-setting.
Tom Jones
Tom Jones Mar 20, 2022 9:35AM ET
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Most NASDAQ stocks are below 200 dma, so the tech market/SPAC bubble has already popped. Tech being held up by only a few large caps. Wouldnt be against the US consumer, who will glad take on more debt and destroy their balance sheets vs reduce consumption and services like vacations.
SunilKumar Dixit
SunilKumarDixit Mar 20, 2022 9:35AM ET
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Rightly said Tom. Cheap money can hardly support parabolic rise for long.
Cem Ce
Cem Ce Mar 20, 2022 9:17AM ET
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I see PlugPower rising like a Star
Carlos Sacasa
Carlos Sacasa Mar 20, 2022 9:10AM ET
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You know who could make up the difference in Oil?....the US. Yes, it will take time, but I bet the could get it up and running faster than other countries.
Barani Krishnan
Barani Krishnan Mar 20, 2022 9:10AM ET
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It's happening, Carlos. Watch this: https://www.bloomberg.com/news/videos/2022-03-08/oil-prices-near-demand-destruction-conocophillips-ceo-video
Tyrone Jackson
Tyrone Jackson Mar 20, 2022 9:10AM ET
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Exactly Carlos- Thousands of jobs and lower cost energy for all - but it won’t happen under the current administration- everything that the liberals touch turns into a mess. Recession in 3 2 1 -
 
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