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Energy & Precious Metals - Weekly Review and Outlook

Commodities Jul 10, 2022 05:18AM ET
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© Reuters.

By Barani Krishnan

Investing.com - The U.S. labor market isn’t giving any other market a break, with the dollar probably being the only exception. 

Friday’s non-farm payrolls report for June again showed how badly the Federal Reserve had underestimated America’s jobs juggernaut. 

While gold’s fate looks quite clear if the dollar explodes higher on bets that all remaining rate hikes for 2022 will be at least 75 basis points, what looks quite uncertain now is the direction for oil. 

Citigroup says oil could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if a demand-crippling recession hits

But some say a break below $90 before the end of July might be the most realistic outcome.

The reason for the limited pessimism in oil is the dip-buying that goes on each time there’s a major selloff.

We saw it again this week. As soon as the price of a barrel broke below $100, various analysts posited that crude perhaps had been oversold.

Their misgivings were understandable. The “higher and higher” mantra has become institutionalized for oil prices, the same way as “lower and lower” was two years ago. 

Back in 2020, it was demand destruction from Covid that got billions of dollars in new oil exploration works and refinery upgrades canceled. We’re paying for those investments today with higher oil prices.

Since 2022 began, the narrative in oil has largely been on three things: the impact of the West’s sanctions on Russia, the folly of clean-energy policies unfriendly to fossil fuels and OPEC’s seemingly impossible task in putting out more barrels.

Amid such mindsets, enters the R-word. The last time a recession was in our midst, it was at the height of the Covid outbreak. But it was brief, so brief that officially, it was estimated to have lasted just about two months — March through April — before demand came surging back for most goods and, eventually, oil. 

The lightning recovery then was due to the Federal Reserve hosing down the fires of the pandemic with a river of easy money, while interest rates were held at almost zero — setting up the catalyst for today’s inflation headache.

This time though, there just can’t seem to be an agreement on how long and deep the recession would be and whether there’d even be one. 

Oil: Market Settlements and Activity 

London-traded Brent crude performed a final trade of $107.15 after settling Friday’s session up $2.37, or 2.3%, at $107.02, adding to the near $4 or 4% gain in the previous session. 

The rebound wasn’t enough to cover Brent’s 12% plunge between Tuesday and Wednesday, which still left the global crude benchmark nursing a 4% loss on the week.

New York-traded West Texas Intermediate, or WTI, meanwhile, did a final trade of $104.80 after settling up $2.06, or 2%, at $104.79 a barrel. 

Like Brent, WTI had also tacked on some $4, or 4%, in the previous session. Despite those gains, the U.S. crude benchmark dipped 3% on the week.

Oil: WTI Technical Outlook

Despite its positive close for the week, WTI needs a sustained break above $111.50, failing which it will likely resume a second bearish wave targeting $100-$95-$92, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

While WTI’s weekly closing came above the 50-week Exponential Moving Average of  $92.60, it was still below the weekly middle Bollinger Band of $108.25.

The weekly stochastic reading of 38/45 also kept WTI bearish.

“A reliable affirmation of short-term price reversal is needed,” said Dixit. “And WTI should really avoid breaking below $92, as that will trigger immediate tests of $88 and $85.”

Gold: Market Settlements and Activity 

Gold futures for August delivery on New York’s Comex settled up $2.60, or 0.2%, at $1,742.30 an ounce. For the week, it showed a drop of 3.3% — its fourth in a row since the week ended June 10. The current week’s loss was also the sharpest since the one for the week ended May 6.

Despite the gloomy weekly statistics, gold has shown resilience somewhat since Wednesday’s 10-month low of $1,730.70. Rebounding from that level, August gold on Comex has barely moved on either side of $1,740.

For gold, there was an additional layer of complication from the jobs data. Even before the latest employment numbers, Fed policy-makers had already appeared resolved to raise rates in July by 75 basis points, just like in June. 

The question is, with runaway jobs numbers like these, would the Fed be tempted to do more? Will all rate hikes scheduled for the year now be 75 basis points or even higher? While almost all money market traders only have a max of 75 basis points on their radar now, the possibility of 100 basis points cannot be ignored altogether down the road. 

Gold: Technical Outlook 

“A cursory look at the weekly chart of gold gives us a four-bearish candle pattern similar to the previous wave,” said skcharting.com’s Dixit, who uses the spot price of gold for his projection.

Dixit noted that gold closed below the weekly lower Bollinger Band of $1,760, with a weekly stochastic reading of 3/11 indicating the approach of oversold territory.

“This typically calls for a short term rebound, towards broken support areas of $1,780-$1,810,” he said. “If gold finds enough buying and sustains above the $1,780-$1,810 supply zone, recovery can extend to the next cluster of resistance at $1,830-$1,845-$1,880. The mid-term trend will turn bullish on a decisive break above $1,880.”

On the flip side, failure to break and sustain above the $1,780-$1,810 areas can push gold towards $1,720-$1,697, Dixit cautioned. “If selling extends, expect a further drop towards the 50-Month Exponential Moving Average of $1,668 and the 200-week Simple Moving Average of $1,650."

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 (11)
Suraj Gupta
Suraj Gupta Jul 10, 2022 1:49PM ET
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any comments on crude??
SunilKumar Dixit
SunilKumarDixit Jul 10, 2022 1:49PM ET
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Suraj Gupta. The story covers extensive details of weekly developments and Outlook for Week Ahead, for WTI Crude Oil as well as Gold.
Murali Krishna
Murali Krishna Jul 10, 2022 11:37AM ET
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640 by end of rate hike cycle
Barani Krishnan
Barani Krishnan Jul 10, 2022 11:37AM ET
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There you go ... attaboy ... $640! ... you never fail, Murali :)
SunilKumar Dixit
SunilKumarDixit Jul 10, 2022 11:37AM ET
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Murali Krishna. Hypothecated hypothesis is not taxed.
Grant Garber
Grant Garber Jul 10, 2022 11:37AM ET
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🙈🙈🙈🙈
Murali Krishna
Murali Krishna Jul 10, 2022 11:36AM ET
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before going to 640, gold has to first go through 1460. Dixie prediction is super hilarious
Murali Krishna
Murali Krishna Jul 10, 2022 10:27AM ET
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Swiss bank gave 1460 by December
Barani Krishnan
Barani Krishnan Jul 10, 2022 10:27AM ET
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Not $640, Murali? ... Thanks, mate :)
Murali Krishna
Murali Krishna Jul 10, 2022 10:20AM ET
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nothing to get confused with gold. gold will keep moving lower. any rally will meet rate hike to push it back down
ravikartik pillai
ravikartik pillai Jul 10, 2022 9:34AM ET
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june inflation is expected to be almost 9%, another 75 bps hike ahead
French Hill
French Hill Jul 10, 2022 9:33AM ET
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I'm confused what that means for gold. is it headed up because of inflation fears or down because of strong dollar?
Edward Chong
Edward Chong Jul 10, 2022 9:33AM ET
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its both.
French Hill
French Hill Jul 10, 2022 9:33AM ET
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I'm confused what that means for gold. is it headed up because of inflation fears or down because of strong dollar?
Barani Krishnan
Barani Krishnan Jul 10, 2022 9:33AM ET
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French Hill, gold's biggest problem is that the dollar has hijacked the safe-haven crown from it.
Francis Lim Wei
Francis Lim Wei Jul 10, 2022 7:23AM ET
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there is potential that it will continue to 108 everything is bullish at the moment. don't trust any news trust only price actions https://www.tradingview.com/x/RZ3nwMmK
Barani Krishnan
Barani Krishnan Jul 10, 2022 7:23AM ET
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It pays to temper your enthusiasm with some chart reality as well. Sunil Kumar Dixit has called oil correctly on both the lower and higher ends. Pay some attention to him.
SunilKumar Dixit
SunilKumarDixit Jul 10, 2022 7:23AM ET
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Francis. While the short term reactive bounce is not ruled out, the upswing is likely to be capped at somewhere below 111.50 Only a sustained break above the said critical level can affirm further gains.
Joe Rizzuto
Joe Rizzuto Jul 10, 2022 6:49AM ET
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dont be so myopic. soft landing- fed rate increases brings down inflation WITHOUT major disruptions in labor market. so far its working! labor market has proven resilient and inflation may have peaked (per falling commodity prices). therefore, the fed should slow to 50 bps step in July and wait for another month of data. the fed can jump back to 75 in September or 25 inter-meetng if necessary. but I understand ur pov, sometimes the 'no brainer' is the tougher choice.
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Barani Krishnan
Barani Krishnan Jul 10, 2022 6:49AM ET
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Joe Rizzulo, you're right to an extent; there is a multiplier effect to what the Fed is doing through QT -- which is hiking rates and dumping bonds in its hold at the same time. The problem with inflationary is that it's reactionary. It may take another three months to get any redemption for the Fed's efforts and, thus, front-loading rates might be the only proven path forward.
Barani Krishnan
Barani Krishnan Jul 10, 2022 6:49AM ET
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Joe Rizzulo, typo: Meant to say that "the problem with inflation" (not inflationary)
SunilKumar Dixit
SunilKumarDixit Jul 10, 2022 6:49AM ET
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Too early to call a peak for the record high inflation. Fed has been working on its toes to tame its genie and its going to be an ongoing struggle. The exercise may pause for a while after a certain extent to ascertain the effects.
Joe Rizzuto
Joe Rizzuto Jul 10, 2022 6:49AM ET
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thank you for the reply. if the fed goes to far in front loading rates waiting for lagging proof that inflation is heading back to 3%, it will be a hard landing... the labor market will be trashed and you will be writing that the fed should have slowed down policy at the early signs of peak inflation able to step up at anytime.
Brad Albright
Brad Albright Jul 10, 2022 6:49AM ET
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@Joe. Good to see your level headed comments among the politically driven hysteria.
 
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