By Barani Krishnan
Investing.com -- Saudi Arabia has warned that it cannot bear responsibility for any shortage of oil supplies to global markets, in light of continuing attacks against its facilities. The kingdom’s energy ministry said the international community needs to realize the role of Iran in supporting Yemeni Houthi rebels to target oil and gas production sites.
There are three major risks for world oil markets from the Saudi warning.
The first is that the kingdom’s energy company Aramco (SE:2222) cannot be blamed if it is unable to deliver oil as contracted due to the impact of such attacks, a situation typically known in the industry as the declaration of force majeure.
The second is that the attacks may become enough of a distraction for Aramco - in second-guessing the rebels on the next sites they would target and reinforcing the security and resilience at such places - that it has little time and energy to pursue more productive activities that include, yes, production of more oil.
Of course, even without the attacks, neither Crown Prince Mohammed bin Salman nor his brother Abdulaziz, the energy minister, had any intent of raising the Saudi crude production meaningfully, as their aim was to milk the most they could out of oil prices from the Russia-Ukraine war. The attacks have just given them a better excuse not to add a single barrel beyond what they want.
The third risk to oil markets from the Saudi caution about Yemeni Houthi rebels is that it could add another layer of demand by the U.S. and other world powers to the already onerous Iran nuclear negotiations. That demand could be that Tehran desist immediately from any support - real or implied - for all Houthi-based terror attacks.
Friday’s attack on the Aramco oil depot in Jeddah has already been roundly condemned by the international community, with U.S. National Security Advisor Jake Sullivan branding it as one of those “unprovoked acts of terrorism aimed to prolong the suffering of the Yemeni people”.
From a moral standpoint, it would be right for the U.S. to demand that Iran compel the Yemeni Houthi rebels whom Tehran sponsors to stand down from any further aggression against Saudi Arabia and its energy facilities if the Islamic Republic wishes to have its nuclear deal. The reality is that this is easier said than done.
The negotiations between the world powers and Iran have already dragged on for 11 months and are on the verge of finally going through or collapsing altogether. At this point, adding yet another clause - written or expressed - to the spirit of the agreement could virtually be the final Saudi straw that breaks the Iranian camel’s back.
The Saudis, of course, do not want the nuclear deal - originally signed in 2015 under the Obama administration and in force till the Trump administration canceled it in 2018 - to be revived in any way by the Biden administration. Their argument is that Iran, free from U.S. sanctions on its oil, would use the proceeds from that to fund further terrorism against Saudi Arabia.
The Biden administration, of course, knows this. But it is aware of something else too: The Saudis want to dominate the oil market in every way possible. They want as little competition as possible over their market share within OPEC+.
A fully-empowered Iran back in OPEC might complicate matters for the Saudis despite their seemingly unassailable position now at the apex of the organization and the world oil market. Crown Prince MbS’ colluding with Donald Trump and the former president’s son-in-law/adviser Jared Kushner to make Iran a pariah within the same OPEC it helped found has only increased the Mullahs’ enmity with the House of Saud. It’s going to take a lot of diplomacy to resolve this on both sides and the Biden administration might decide - correctly - at this point that it’s not Washington’s problem to babysit.
Also, free markets and competition are at the very heart of American commerce and OPEC is the antithesis of that. The Saudis are doing nothing to alleviate the sky-high prices of oil. Their supporters - which include all those long the market - immediately get into a “why should they?” chorus whenever the question is raised. Thus, the world powers at the negotiating table - which, interestingly, include OPEC+ overseer and relatively new Saudi ally Russia - will not hold up the deal as well, unless there is a serious breach again of uranium enrichment by Iran.
Oil: Weekly Market Activity
The missile strike at the oil storage depot in Jeddah sent crude prices up more than 1% Friday, reversing a 2% drop from earlier in the day and giving the market its best weekly gain since the Russian invasion of Ukraine.
Yemeni Houthi rebels claimed responsibility for the attack, with a spokesperson for the group saying it “would be announcing more details on a wide operation in Saudi Arabia”.
Twitter was ablaze on Friday with visuals of a huge plume of black smoke seen rising in Jeddah, the second largest Saudi city after capital Riyadh, where state-owned oil firm Aramco has several facilities.
“It’s the last thing we need in a tight market situation like this but I guess oil bulls can thank the Houthis for sending crude back to $120 levels before the weekend,” said John Kilduff, partner at New York energy hedge fund Again Capital.
London-traded Brent, the global benchmark for oil, settled up $1.62, or 1.4%, at $120.65 per barrel. It had fallen more than 2% earlier, touching a session low of $115.21.
For the week, Brent was up 11.8% after accounting for other price spikes on Monday and Wednesday. It was Brent’s biggest weekly gain since the 20% rally in the week that marked the start of Russia’s Feb. 24 invasion of Ukraine.
U.S. crude’s West Texas Intermediate, or WTI, benchmark settled up $1.56, or 1.4%, at $113.90. WTI was down to as much as $108.77 earlier. For the week, the US crude benchmark rose 8.8%.
Crude prices fell earlier on Friday on the easing of some supply concerns on the European market, particularly the partial export resumption from Kazakhstan's CPC crude terminal that Russia’s energy minister said on Wednesday might be out for two months due to storm damages.
A coordinated release of crude from the emergency reserves of the United States and other consuming countries also weighed on prices earlier, with reports that more than 30 million barrels might come from the U.S. Strategic Petroleum Reserve to ease the oil deficit heightened by the month-long Russia-Ukraine war.
Oil: WTI Technical Outlook
WTI needs to hold at above $112 to overshoot $120 in the coming week, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.
A daily settlement below $112 could push the U.S. crude benchmark to as low as $104, and, ultimately, even to $98, Dixit cautioned.
For the just-ended week, he noted that WTI gained a net $9.80, rebounding strongly after a two-week correction that took it from a high of $130 to $93 at one point.
The weekly stochastic reading of 74/67 and RSI reading of 72 both indicate further upside potential for WTI, Dixit said.
“For the week ahead, as long as oil sustains above $112, prices are likely to advance to between $116 and $122.”
“But weakness below $112 can push oil down to $109 - $107 first and later $104, which will mark an acceleration point to the further downside of $98.”
With both the monthly closing for March and the first quarter finish due next week - along with a flurry of critical economic data- market volatility could be at its peak.
Gold: Weekly Market Activity
A spike in U.S. Treasury yields sent gold prices skidding on Friday, although the yellow metal held on to a weekly gain of more than 1% on the back of geopolitical tensions fed by the war in Ukraine and inflation concerns that had Americans more worried than during the 1980s and 2008 recessions.
The most-active gold futures contract on New York’s Comex, April, settled the day’s trade down $4.45, or 0.23%, at $1,957.75 an ounce. For the week, the benchmark gold futures contract was up $24.90, or 1.3%.
Friday’s slide in gold came as the 10-year U.S. Treasury note rose by 4.8%, adding to Thursday’s 3.5%, pressuring bullion which is non-yielding. After a tumble last week on the Fed’s modest first pandemic-era rate hike of 25 basis points, yields have started climbing again as the central bank announced plans for more aggressive hikes of 50 basis points in the future to contain inflation at 40-year highs.
Gold typically thrives in an environment of heightened political and economic fear, and the war in Ukraine and runaway U.S. price pressures had fed both of these.
Craig Erlam, analyst at online trading platform OANDA, said gold will likely continue being “well supported against the backdrop of sky-high inflation and immense uncertainty”.
“That doesn't necessarily mean we're heading for record highs, which we currently sit a little more than 5% below,” Erlam added, referring to Comex’s all-time highs of $2,121 for gold. “But, as is the case more broadly right now, the main catalyst continues to be the constant flow of headlines which will continue to determine the path of travel for the yellow metal.”
U.S. gross domestic product, or GDP, grew 5.7% last year, expanding at its fastest since 1984. But inflation, as measured by the Consumer Price Index, or CPI, grew at an even faster rate, expanding by 7% in 2021, its most since 1981.
The CPI has continued to expand aggressively since the start of 2022, reaching a year-on-year growth of 7.9% in February versus a GDP growth of 2.8% forecast for all of the year by the Federal Reserve. The central bank’s tolerance for inflation is a mere 2% per year and it vowed to slow price pressures with a series of rate hikes through next year.
Americans are more worried about inflation now than they were during the worst two US recessions in the 1980s and 2008, the University of Michigan said Friday in its closely-followed Consumer Sentiment Survey.
“With an expected year-ahead inflation rate at 5.4%, the highest since November 1981, inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions,” Richard Curtin, chief economist for UMich’s Surveys of Consumers, said in a statement.
Umich’s Consumer Sentiment Index, updated every two weeks, remained at August 2011 lows, while people’s worries about inflation appeared to grow more dire in a nation where consumer spending made up 70% of the economy, Curtin said.
“When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past fifty years: from March 1979 to April 1981, and from May to October 2008,” Curtin added.
Gold: Technical Outlook
Gold’s test will be to get above the $1,962 - $1,968 levels and eventually $1,972 - $1,985 for a return to $2,000 levels.
Failure to break and sustain above those levels could send the yellow metal back to the $1,920-$1,910 lows, said Dixit of skcharting.com, who made his projections based on the spot price of gold.
Despite tumbling to $1,910 mid-week, the yellow metal pulled back, peaking at $1,966 before trading within the $1,962-$1,943 range before settling the week at $1,957, Dixit noted.
The weekly stochastic reading of 61/62 and RSI reading 63 were in a position for further upside, though room for some correction exists, he said.
“The week ahead can begin on a flat note.
"The upward momentum will come if prices manage to break and sustain above $1,962 - $1,968 and test $1,972 - $1,985, which is the acceleration point for a further up move to $1,998 - $2,010.”
“Failure to break and sustain above $1,962 - $1,968, or rejection at the same areas, may cause gold to slip to $1,950 - $1,943 again. Breaking this may retest $1,937 and extend the downside to $1,920 - $1,910.”
He put overall weekly support at $1,895 - $1,870 and resistance at $1,998 - $2,010.
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.