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Energy & Precious Metals - Weekly Review and Outlook

Commodities Jul 03, 2022 04:24AM ET
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By Barani Krishnan

Investing.com - Like wailing banshees, storms from the Atlantic hurricane season are expected to head toward the U.S. Gulf Coast of Mexico in the coming weeks.

The drone of recession talk should get louder too across America, after the Atlanta Federal Reserve’s forecast of a second straight quarter of economic decline for the year.

The two phenomena will likely, at some point, be on a collision course in deciding the dynamics and fortunes of the oil and natural gas markets.

Hurricanes come and go each year. But any storm in 2022 could have a rippling impact on energy infrastructure, supply and prices due to the squeeze already on barrels from sanctions piled on Russia; the apparent inability of OPEC+ to produce what consuming countries want and US shale being slower than ever in returning to its pre-pandemic drilling glory.

“You cannot afford to lose a single barrel this summer. That’s the reality,” said John Kilduff, founding partner of New York energy hedge fund Again Capital.

You might not want to lose a single bcf - or billion cubic feet - of gas either.

The Energy Information Administration said U.S. natural gas storage for the week ended June 24 rose by 82 billion cubic feet versus market expectations for a build in the 74s. In the previous week to June 17, the storage rose by 74 bcf against forecasts for an injection of 65 bcf.

Every bcf of gas inventory gained this summer will be invaluable in keeping cooling and power bills lower for Americans, already choking from inflation stubbornly holding at 40-year highs despite three rate hikes by the Federal Reserve and promises of more.

U.S. natural gas storage is expected to stay in a deficit of 300 bcf or more of its five-year average due to underproduction of natural gas this year and commitments to European LNG buyers desperate not to touch sanctioned Russian gas if they could.

Until three weeks ago, there seemed barely any relief for the situation in gas supplies, which looked tighter than that of oil. All that changed with the June 9 blast at the Freeport LNG plant on the Texas Gulf Coast.

Freeport used to account for around 20% of all U.S. LNG processing, liquefying up to 2.1 billion cubic feet of natural gas per day.

Initially, it was estimated that the outage would take just about a million tonnes of LNG exports off the market. But later, it was estimated that the disruption could last as long as three months, or until early September, impacting at least 180 bcf of gas in total.

 As of Thursday, the start-by date for the plant was pushed even further, towards October.

Analysts say the amount of gas idled - or not liquefied - by Freeport would be equivalent to around 55% of the current storage deficit, with the final number decided by how hot a summer the United States and Europe would have and how much domestic cooling and European LNG demand that would result in.

Prior to the Freeport blast, U.S. gas hit 14-year highs of $9.66 per million metric British thermal units on June 8. At the time of writing, it was at just $5.62 per mm Btu, after a 13-week low of $5.36 on Thursday. From a peak annual gain of almost 160% three weeks ago, gas was up just 51% on the year. Almost all of that wipeout was due to Freeport.

Guessing how gas demand for cooling in the summer would fare and how much of that would be offset by what Freeport will not be liquefying has been a challenge to the market.

Forecaster NatGasWeather said weather models for the first half of July maintained a hot pattern over most of the southern two-thirds of the United States, with peaks forecast in the 90 F to lower 100 F range.

“It’s still a bullish pattern July 10-13, just not quite as hot as July 1-9,” NatGasWeather said in comments carried by industry portal naturalgasintel.com. “Overall, the coming 15 days are plenty hot enough to be considered bullish since it will prevent deficits from improving.”

But some think the summer heat might not make so much of a dent on storage.

“In the long-term, the storage deficit to the five-year average is expected to decrease as the impacts of Freeport (and higher production down the line) will alleviate tightness in the market,” analysts at Houston-based gas markets consultancy Gelber & Associates said in an email to their clients on Wednesday, that was also seen by Investing.com.

Adds the Gelber email: “Within the next four weeks, the storage deficit (which is sitting above 300+ bcf) is anticipated to sink to under 280 bcf based on current weather patterns.”

Thus any hurricane hit on the U.S. Gulf could severely change the supply dynamics of gas. During last year’s Hurricane Ida, more than 77% of gas production in the U.S. Gulf was shut in by the first week of September.

In the case of oil, Bloomberg columnist Julian Lee noted that record volumes of crude were being shipped out of terminals on the U.S. Gulf coast, to buyers in Europe and Asia. A big storm, or a succession of storms as we saw in 2005 or 2008, would put those flows at risk, perhaps for several weeks.

“Powerful winds, high tides and storm surges will put overseas shipments at risk, spreading the impact of any storm far beyond U.S. shores,” Lee said. “Exports of crude and refined products are running close to 10 million barrels a day.”

Kilduff of Again Capital concurred with that view, saying U.S. energy infrastructure was “more vulnerable than any time in history to storms.”

“This is because of the global situation,” Kilduff said. “In years past, a storm comes through but it doesn’t knock us off the pedestal. This year, any one of these storms could knock the global oil market off its block.”

Equally crippling to oil could be the evolving recession in the United States.

Economists say the United States may be witnessing the beginnings of a real economic shakedown, only that it’s too numb to notice because of the miraculous resilience of its consumers insulated by two years of pandemic aid money; a housing market still running on that old stimulus energy and stock markets often coming back after a few days of selloffs.

But U.S. consumers won’t be superheroes forever and the slide into the economic abyss could come faster than thought, warn analysts.

In oil markets especially, “the prospect of a recession has created more two-way price action in recent weeks, preventing any unsustainable surges in the price of crude [even] as China reopened” from COVID shutdowns, said Craig Erlam, analyst at online trading platform OANDA.

Oil & Gas: Market Activity and Settlements

Crude prices flew higher as trading began for July on the back of fresh supply scares out of Libya - which called for a force majeure in exports - and Norway, where an oil workers’ strike loomed.

Barely 24 hours after June’s price plunge - the first for a month since November - it was a sign that oil bulls had recaptured at least some of their lost mojo even as an impending recession threatened market outlook over the coming months.

New York-traded West Texas Intermediate, or WTI, crude registered a final post-settlement trade of $108.46 after officially closing the session up $2.67, or 2.5%, at $108.43 per barrel. The U.S. crude benchmark had finished June down more than 7%.

London-traded Brent crude, the global benchmark for oil, posted a final post-settlement trade of $111.48 after settling up $2.60, or 2.4%, at $111.63. It fell nearly 6% for June.

Natural gas on New York’s Henry Hub showed a final post-settlement trade of $5.62 per mm Btu, after finishing Friday’s official session up almost 31 cents, or 5.7%, at $5.73. It plunged more than 33% for June.

Oil & Gas: Price Outlook

So long as WTI sustains above $104 and does not slide below $101, more upside is expected towards the 50-Day Exponential Moving Average of $110.20 and the Daily Middle Bollinger Band of $113.20, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“If bullish momentum attracts enough buying above $114, then a new short term rally will target $116-$119-$121,” said Dixit.

On the flip side, he said a sustained break below $104 and $101 could bring about a quick breakdown towards $98-$95-$92.

Gas, meanwhile, was still technically weak after having endured one of the worst losses in history that saw it going from a top of $9.66 to a low of $5.35.

“Bears are aiming for the next leg lower of the monthly middle Bollinger Band of $4.47, followed by the 200-month Simple Moving Average of $4.25,” said Dixit.

A sustained breakout above $6.54 could, meanwhile, extend Friday’s rebound to the 50-Day Exponential Moving Average of $7.22, he said. But this has a bearish confluence, with the Daily Middle Bollinger Band of $7.31 limiting gains and making the rebound short-lived.

Gold: Market Settlements and Activity

Front-month gold futures for August on New York’s Comex registered a final post-settlement trade of $1,812.90 an ounce. It earlier settled Friday’s trade down $5.80, or 0.3%, at $1,801.50 an ounce. During the session, August gold tumbled to $1,783.40 - its lowest since the $1,781 level plumbed on Dec. 9.

The rebound aside, it was a perfect week in the red for the yellow metal which settled lower in every one of the five sessions to cumulatively lose some $30, or 1.6%, on the week. 

It was a third straight week of losses for gold after prior drops of 0.6% and 1.9%. For June itself, gold had lost more than 2%, rounding out a straight month in the red.

For gold, the Fed doesn’t seem to be its only nemesis: It’s also Indian tax authorities.

Bullion’s dive to near seven-month lows on Friday came after the government in New Delhi raised import taxes on gold to support the battered rupee as trading for July opened. 

India, the world’s second biggest bullion consumer, raised its basic import duty on gold to 12.5% from 7.5%. The move will immediately affect demand, even though the third quarter usually sees strong physical buying amid festivals, Ajay Kedia, director at Kedia Commodity in Mumbai, said in comments carried by Reuters.

India and China alternate as the biggest buyers of gold and any policy moves by the two on the metal typically get traders in the space flustered.

Bullion bulls were wounded for a third straight week by the Fed’s rate cudgel as policy-makers at the central bank showed no backing down in their aim to tame the inflation beast by doubling the Fed funds before the end of the year.

Gold: Price Outlook

Dixit said a further upward move can lead to a sustainable break above $1,815, extending gold’s rebound to the Daily Middle Bollinger Band of $1,832 and the 200-Day Simple Moving Average of $1,846, as well as the 50-Day Exponential Moving Average of $1,850.

But rejection from the $1,846-$1,850 level can trigger a quick breakdown towards $1,815-$1,800-$1,780, said Dixit who uses the spot price of bullion for his outlook.

This marks the acceleration point for a deeper correction towards a 50-month Exponential Moving Average of $1,670 and the 200-week Simple Moving Average of $1,647 in the mid-term, said Dixit.

“A tug-of-war between shorts targeting $1,700-$1,650 and bulls looking for value buying from the lows may keep the metal suppressed in the lower range, before any significant resumption of a bigger bull run,” added Dixit.

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 (6)
Alpha Omega
Alpha Omega Jul 03, 2022 12:24PM ET
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Are you a stock market gambler ? Forget Oil, Crypto , Bonds. GOLD Has the answer, Up or Down.
Dave Jones
Dave Jones Jul 03, 2022 11:31AM ET
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Not one single physical ounce of silver will be bought at the virtual price the so called market sets. With that said what is the point of these corrupt entities? Silver can't even be mined at this point.
SunilKumar Dixit
SunilKumarDixit Jul 03, 2022 11:31AM ET
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Virtual prices and paper contracts often work at odds with physical availability.
Dave Jones
Dave Jones Jul 03, 2022 11:31AM ET
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SunilKumar Dixit which means that the entire thing is a farce
SunilKumar Dixit
SunilKumarDixit Jul 03, 2022 11:31AM ET
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Not farce exactly. Some difference to acceptable extent.
jason xx
jason xx Jul 03, 2022 10:38AM ET
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Atlanta fed predicted that huh? If so FED will have to ease up on tightening.
Barani Krishnan
Barani Krishnan Jul 03, 2022 10:38AM ET
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Yes, Jason. They made that call on June 30 under their Fed Now forecast.
SunilKumar Dixit
SunilKumarDixit Jul 03, 2022 10:38AM ET
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Jason. Very likely to happen.
Alpha Omega
Alpha Omega Jul 03, 2022 10:38AM ET
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Atlanta Fed has the habit of correcting itself. AllOfItsForecastsAreWritenInPENCIL. For instance, it's current forecast is -2.1% the next forecast should be -1.4% and the one before final tally -1% What then? Raise or Lower ?
Barani Krishnan
Barani Krishnan Jul 03, 2022 10:38AM ET
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Perhaps, but the possibility of a recession appears to be growing by the day; so Atlanta Fed aren't the only ones saying this, Alpha Omega
SunilKumar Dixit
SunilKumarDixit Jul 03, 2022 10:29AM ET
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Precious-metals likely to trade with enhanced volatility in the upcoming days.
Barani Krishnan
Barani Krishnan Jul 03, 2022 10:29AM ET
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Yes, Sunil. It will be good to see some swings after the pedestrian moves of the past 3 weeks.
ahmad allowh
ahmad allowh Jul 03, 2022 8:34AM ET
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1000000
Roy Avrahami
Roy Avrahami Jul 03, 2022 8:12AM ET
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