Energy & Precious Metals - Weekly Review and Outlook

© Reuters.

By Barani Krishnan

Investing.com -- There’s information and then there’s disinformation. This past week, governments to markets were trying to figure out how much information - and disinformation - there is to China’s zero-Covid policy and its extended lockdown of Shanghai.

Déjà vu of a 2020 China mired in pandemic catastrophe weighed on the sentiment in oil this week, even as the EU-Russia face-off over Ukraine suggests crude prices have little way to go but up.

Global oil benchmark Brent and U.S. crude’s West Texas Intermediate, or WTI, benchmark settled down on Friday, logging a third weekly loss in four, reacting to the Covid clampdown on Shanghai, as well as the prospect of weaker global growth and higher interest rates.

According to official government data released this week, China’s economy grew 4.8% year on year in January-March.

But the IMF and banks including UBS, Bank of America and Barclays this week downgraded their growth forecasts for China in 2022.

Nomura’s forecast was especially pessimistic, a growth of just 3.9%, that would mark China’s slowest growth rate since 1990 – apart from 2020, when the pandemic derailed the global economy.

Economists said despite the positive first-quarter data, storm clouds were on the horizon as retail sales, a key indicator of economic health, fell 3.5% in March compared with the same period last year.

The gloomy outlook provided a temperature check of the world’s second-largest economy, while dubious Covid-19 death rates focused attention on Beijing’s reputation for secrecy and narrative control at all costs.

But what really bothers analysts is that President Xi Jinping’s intent to force China to hew to a zero-tolerance approach towards the virus comes long after the rest of the world has moved on from the pandemic.

In most countries, including the United States, guidelines stipulate that any death where Covid-19 is a factor or contributor is counted as a Covid-related death.

But in China, health authorities count only those who died directly from Covid-19, excluding those whose underlying conditions were worsened by the virus, said Zhang Zuo-Feng, an epidemiologist at the University of California, Los Angeles.

“If the deaths could be ascribed to underlying disease, they will always report it as such and will not count it as a Covid-related death, that’s their pattern for many years,” said Jin Dong-yan, a virologist at the University of Hong Kong’s medical school.

That narrower criteria means China's Covid-19 death toll will always be significantly lower than those of many other nations.

In the meantime, as a result of the Shanghai lockdown, Bloomberg reports that China’s demand for gasoline, diesel and aviation fuel in April is expected to slide 20% from a year earlier.

That would be equivalent to a drop in crude oil consumption of 1.2 million barrels a day, they said, and will be the largest hit to demand since the lockdown more than two years ago in Wuhan — the central Chinese city where Covid-19 was first reported in 2020.

“Yet China is talking about reopening, and it does not seem like the demand drop helped buffer the global oil supply,” said Phil Flynn, energy analyst at Chicago’s Price Futures Group.

Oil: Weekly Settlements & WTI Technical Outlook

London-traded Brent settled Friday’s trade down $2.13, or 1.97%, at $106.20 per barrel. For the week, Brent showed a 4.5% loss that came after a near 9% gain last week and the 13% drop in two prior weeks. If the declines keep up, April will be the first month in the negative this year for Brent.

New York-traded WTI settled Friday’s trade down $2.04, or 1.97%, at $101.75. Like Brent, WTI showed a drop of 4.5% for the week, and similar volatility to the U.K. benchmark in three previous weeks.

Weakness below $102 can prompt WTI to test the 50-Day Exponential Moving Average of $100.40, below which sellers may try to seek the Fibonacci level of $99, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“Going into the week ahead, volatility is likely to continue driving oil sideways with a bearish bias,” Dixit said. “Major support and downside targets are at $92.93 and $92.”

“WTI’s weekly stochastic reading of 41/46 and Relative Strength Indicator of 58 indicate that trend is weakening and lower prices are very likely,” he added.

On the upside, a sustained move above the 50-Day EMA of $100.40 indicates buying with upside targets of $103.80 and $105.40, Dixit said.

Gold: Weekly Market Activity 

Gold to silver, platinum and palladium joined oil and other energy commodities on Friday in the sea of red buffeting Wall Street indexes from the Dow to the S&P 500 and Nasdaq.

​​“Every time you get this massive acceleration down in equities on rate hike talks, you’re going to have some follow-through selling on precious metals,” Phillip Streible, metals strategist at Blue LIne Futures in Chicago, said. “The baby goes out with the bathwater, so to speak.”

Front-month June gold futures on New York’s Comex settled Friday’s trade down $15.70, or 0.8%, at $1,932.50 an ounce. For the week, it fell 2%, an unexpected slide after its upward swing on Monday to a six-week high of $2,003.

Gold slid as the Dollar Index hit a more than two-year high of 101.34 on Friday while the benchmark 10-year Treasury yield neared December 2018 highs.

“High inflation and an uncertain economic environment have been very supportive for the yellow metal and I don't expect that to change but the more tightening markets price in, the more resistance we'll see gold rallies,” said Craig Erlam, analyst at online trading platform OANDA.

“Of course, that may change if recession warnings start flashing but as yet, there remains some confidence that this can be avoided,” said Erlam. “The 5/30-year bonds have inverted again which may cause some alarm but at the moment, the 2/10 spread remains positive, just.”

Friday’s liquidation trigger for markets came from tough rate hike language that was started early in the week by an array of Fed officials - including James Bullard and Mary Daly, who head the central bank’s St. Louis and San Francisco divisions, respectively - and was echoed toward the end of the week by Chairman Jerome Powell himself.

All were pushing for a 50-bps, or half percentage point, hike at the Fed’s next policy meeting set for May 4-5 after the mere 25 bps, or quarter point, increase in March. Bullard was even suggesting a 75 bps, or three-quarter point, hike at some point, saying the Fed was way behind the curve in fighting inflation that showed no sign of retreating from 40-year highs.

“Some fear that a 50 basis point rate increase will be the first of many and could slow down the economy and the demand for oil,” said Phil Flynn.

“It is not just a tightening cycle upsetting traders overnight but also the pricing in of a 50-basis point interest rate increase by September by the European Central Bank," added Flynn. "The Bank of Japan on the other hand wants to remain dovish but worries that the course of the U.S. and Europe could force them to change course.”

Fawad Razaqzada, analyst at ThinkMarkets, concurred with Flynn.

"We won’t be hearing much from Fed speakers in the next couple of weeks as we enter the blackout period ahead of the central bank’s May 4 meeting. But the damage has already been done and the message has been loud and clear: US Federal Funds Rate will most likely rise by 50 basis points at that meeting,” said Razaqzada.

Gold: Technical Outlook

Dixit of skcharting.com said a sustained move below $1,930 could push gold down toward the 61.8% Fibonacci level of $1,900 and eventually $1,888.

“The weekly stochastic and RSI readings of 51/58 and 56 are pointing to further downside,” he said, referring to the spot price of gold.

On the flip side, if prices manage to sustain above the 50% Fibonacci level of $1,930, the first upside target would be the 38.2% Fibonacci level of $1,960, Dixit said.

“If gold attracts enough buying above $1,960, it can retest the 23.6% Fibonacci level at $2,001,” he added.

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