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Energy & Precious Metals - Weekly Review and Outlook

Commodities Jul 17, 2022 09:06AM ET
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By Barani Krishnan

Investing.com - Will the now-viral fist bump result in more oil for the world? Possibly in the coming weeks, says the White House. But Saudi Crown Prince Mohammed bin Salman (a.k.a. MbS), who received the fist bump from President Joe Biden, says the kingdom’s output will climb by just a million to reach 13 million barrels per day, and that only by 2027.

The truth is probably somewhere in between.

Biden’s awkward encounter with a man and kingdom that he had hoped to isolate for the 2018 butchering of Saudi-journalist-turned-US-resident Jamal Khashoggi underscored the challenges for a president desperate to bring home relief from high gasoline prices. Months of painstaking behind-the-scenes work by U.S. State Department and Saudi palace officials made it happen, and each side played up the positives from Friday’s photo-op between the two men.

Politically, the gambit seemed a disaster for Biden, with criticism from some of his own party faithful, led by California Democratic Senator Adam Schiff, who tweeted that “one fist bump is worth a thousand words” and this one showed "the continuing grip oil-rich autocrats have on U.S. foreign policy in the Middle East." Khashoggi’s widow also tweeted, telling the president that “the blood of MbS’ next victim is on your hands”.

But strategically, even if the Saudis raise production slightly in the coming weeks — after the additional 650,000 bpd a month that OPEC+ has already committed for July and August — it’s a win of sorts for the White House.

With the Biden visit, it’s looking increasingly likely that Saudi oil policy towards the administration will not be as toxic as before. This is in spite of the president reminding MbS on Friday that he held him responsible for Khashoggi’s death, to which the monarch responded by releasing pictures of the two of them smiling and chatting.

To MbS, most important was to show the world that Biden acknowledged him as the next Saudi king and that the president recognized Riyadh as holding the levers to the world’s oil. In Biden’s case, he wanted to tell MbS who he really thought he was to his face, and that he was there as a president of the American people. In that sense, both got what they wanted.

The week in oil itself scored 1 for the bulls and 0 for the bears.

​​Crude prices fell as much as 7% on the week as earlier losses induced by a strong dollar offset the likelihood that Biden’s Saudi visit will not immediately lead to additional production of oil. The dollar surged to two-decade highs between Wednesday and Thursday after panic across markets that the Federal Reserve might opt for a record 100-basis point rate hike next to quell new four-decade highs in consumer prices — a threat later downplayed by the central bank’s officials.

Crude’s increasing sensitivity to the dollar, Fed rate hikes and recession threats showed it was turning into a greater financial play than a commodity driven just by supply-demand.

Global crude benchmark Brent crude has fallen for five straight weeks now, losing a cumulative 17%. U.S. crude’s West Texas Intermediate, or WTI, gauge has dropped in four of those five weeks, sliding by a net 19%.

The narrative in oil now is no longer about barrel deficiency alone. Over the past week, previously unasked questions about whether oil had become too pricey for consumers and needs to come down meaningfully to lower inflation have started getting investors’ attention. All these questions coincide with pump prices of U.S. gasoline that have also started their descent from last month’s record highs of above $5 a gallon to a national average of $4.55 last week.

The average price of U.S. gasoline, all grades combined, has now dipped for the fourth week in a row, to $4.65 as of Monday, according to data from the Energy Information Administration, or EIA.

In the week through July 8, gasoline consumption plunged by 9.7% to 8.73 million barrels per day, on a four-week moving average, according to EIA data. The EIA measures gasoline consumption in terms of barrels supplied to the market by refiners, blenders, etc., and not by retail sales at gas stations. This was the steepest decline yet so far this year.

Some say that U.S. drivers are resorting to all kinds of tricks to put a lid on their gasoline expenditures: Drive a little less, take it easier with the gas pedal, cut out unnecessary trips, plan shorter road trips, prioritize the most fuel-efficient vehicle in the garage, use mass transit, etc.

A debate now is whether a recession — which the Fed says it’s trying hard to avoid despite Deutsche Bank, JPMorgan Chase & Co. and Morgan Stanley suggesting one may be inevitable — will do more to bring oil consumption and prices down.

But talk of a recession — and how badly that could impact oil — may also be overblown as the physical market for crude remains strong.

While June and July have brought sweeping changes to what decides the direction in oil, new restrictions on Russian exports or a shipment blockade in Libya or Nigeria can still turn the market on its head, sending crude prices soaring.

And despite the selloff in Brent and WTI, oil for near-term delivery continues to trade at a big premium to contracts for later delivery. The downward curve slope, known as backwardation, is a hallmark of a very tight physical oil market. At about $4 a barrel, the front-to-second front month backwardation is near its strongest ever. Back in July 2008, the oil time-spreads were in the opposite condition: a contango, with spot barrels at a discount to forward contracts, a sign of an oversupplied market.

Liquidity in oil market futures is, meanwhile, poor, leaving them vulnerable to anyone unwinding a large position or selling forward contracts. Over the summer, several big producer-hedging deals are likely, including the annual deal used by the Mexican government to lock in prices for the following year. Wall Street banks also have large put options for 2023 — likely a sign that a big client was in the market hedging oil prices.

Oil: Market Settlements and Activity

New York-traded West Texas Intermediate, or WTI, crude posted a final trade of $97.57 per barrel on Friday, after settling the official session up $1.81, or 1.9%, at $97.59 per barrel.

For the week, however, WTI was down 6.9% after plumbing a near five-month low of $90.58 on Thursday.

The U.S. crude benchmark has also lost 8.1% since the start of July.

London-traded Brent crude posted a final trade of $101.13 per barrel on Friday, after settling the official session up $2.19, or 2.2%, at $101.16 a barrel.

The global crude benchmark fell to $95.42 in the previous session, marking a low since late February.

For the week, Brent was down 5.5%, while for July it has lost 7.4%.

Oil: WTI Technical Outlook

Amid heightened volatility ahead, WTI’s sustained move away from the just-ended week’s lows of $90.58 to hold at above $92 can push it towards the Daily Middle Bollinger Band of $104.30, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“If WTI manages to break and sustain above week high of 105, the recovery can extend to the 50-Day Exponential Moving Average of $106.80 and the 100-Day Simple Moving Average of $107.40, as well as the weekly middle Bollinger Band of $108.50,” said Dixit.

But he also cautioned that failure to breach $105 could resume WTI’s downward correction to $94-$92-$90.

“If WTI breaks below $90, it will eases the drop to the vertical support of $88-$85-$83,” Dixit added.

Gold: Market Settlement and Activity

Gold for August delivery on New York’s Comex posted a final trade of $1,706.50 an ounce on Friday, after settling the official session down $2.20 at $1,703.60.

For the week, however, August gold was down 2.2% after plumbing a 27-month low of $1,695 on Thursday.

The U.S. gold benchmark has fallen for five straight weeks now, losing a cumulative 9%. Year-to-date, it is down 7%.

Since the Consumer Price Index for the year to June came in on Wednesday at a new four-decade high of 9.1%, bets on rates have been volatile — with the pendulum swinging between an unprecedented increase of 100 basis points for July versus the broader consensus for a 75-basis point hike.

“Risky assets have been beaten up enough and could be ready for a bounce here,” said Ed Moya, analyst at online trading platform OANDA. “The precious metal is still vulnerable to further technical selling.”

Gold: Technical Outlook

Dixit of skcharting said the five-week drop in gold has taken out all key markers including the Middle Bollinger Band of $1,877 and the major moving averages 50 week EMA 1837 and 100 Week SMA 1836.

“The stochastic readings for daily gold at 6/12 and weekly gold are 3/6 are extremely oversold,” Dixit said. “Thus, a short-term rebound towards at least $1,745 is a high probability.”

He also said if gold manages to breakout above $1745, it could extend towards $1770-$1,800 and $1,815

“As an erstwhile safe haven, gold is not out of the woods yet and its doors remain open for another break below $1,700, aiming this time for $1683-$1,666-$1,652,” Dixit added.

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 (7)
jason white
jason white Jul 17, 2022 8:06PM ET
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mostly good article. the thought that Biden wanted to tell the crown prince "what he really thought" is laughable.
Barani Krishnan
Barani Krishnan Jul 17, 2022 8:06PM ET
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Nothing laughable in telling a ******that he's a ******
Barani Krishnan
Barani Krishnan Jul 17, 2022 8:06PM ET
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Nothing laughable in telling a mur(derer) that he's a mur(derer).
jason white
jason white Jul 17, 2022 8:06PM ET
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Agreed. don't misunderstand: The thought that Biden, hat in hand, actually said anything of substance on the matter, is laughable.
jason white
jason white Jul 17, 2022 8:06PM ET
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...and the thought that MBS would care what Biden says (assuming he said anything on the matter), when Biden has zero leverage, also draws a chuckle.
Dave Jones
Dave Jones Jul 17, 2022 11:33AM ET
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Is the price of oil on the market the same as the price of oil from the oil fields? ie do the producers get this amount? Why isn't that the case with silver? Price of silver is 18 something. The mines either cannot produce it for that much or sustain it which means they will be mothballed which will choke physical supplies. There is huge demand for silver by solar and electric cars. Every year there's a silver shortfall and the stockpile of world reserves is getting smaller and smaller. At what point does these disjointed physical and virtual markets break?
SunilKumar Dixit
SunilKumarDixit Jul 17, 2022 11:33AM ET
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Dave Jones. The price parity and the lack of it in physical and futures as also paper contracts keeps moving on with gaps sometimes widening and narrowing and often reaching equilibrium. The contradiction between the real costs and prevailing quotes is seen escalated in times of economic crisis. Similar patterns are also found in cases of Gold to Silver ratio. Just for example.
rob
rob Jul 17, 2022 11:33AM ET
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silver isnt directly mined its picked up in the field when mining other metals if u actually look at what was brought out the ground in 21  in gold and silver and the rate sits at 8.1while the demand was actually down for gold verses what they mined silver had a massive over demand to what was brought up from the ground its actually crazy having a leverage of 93.1
Vijayachander Peddi
Vijayachander Peddi Jul 17, 2022 11:23AM ET
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any effect for ng
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Vijayachander Peddi
Vijayachander Peddi Jul 17, 2022 11:23AM ET
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Barani Krishnan what's the expecting price it's already 7+
ansar khalifa
ansar khalifa Jul 17, 2022 11:23AM ET
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Barani Krishnan you mean it will again retest 6 Dollar
Barani Krishnan
Barani Krishnan Jul 17, 2022 11:23AM ET
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ansar khalifa  and Vijayachander. The temperatures are quite high now in the US and cooling demand has kicked in stronger than before. That's why it could stay in the high $6 and work its way to perhaps $7. After that you gonna need consistent heat/cooling demand. You don't, then you come back down.
ansar khalifa
ansar khalifa Jul 17, 2022 11:23AM ET
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means Friday rally will cool off and again it will come down
SunilKumar Dixit
SunilKumarDixit Jul 17, 2022 11:23AM ET
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As long as Natural Gas sustains above $6.35 we expect consolidation above $7 which targets $8 & $8.30
Feruz Farxodov
Feruz Farxodov Jul 17, 2022 9:36AM ET
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fedgy
Dugan Diesel
Dugan Diesel Jul 17, 2022 9:15AM ET
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Wow! A barrel full of gold only costs “$1,706.50 per barrel on Friday”.? Seems like a steal of a good price for gold.. just gotta figure out how to move all that weight now…
SunilKumar Dixit
SunilKumarDixit Jul 17, 2022 9:15AM ET
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Dugan Diesel. That's an inadvertent typo.
Barani Krishnan
Barani Krishnan Jul 17, 2022 9:15AM ET
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Dugan, that's what 4 am does to you! LOL. Thanks for catching. Have fixed.
Michael Grasso
Michael Grasso Jul 17, 2022 9:15AM ET
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can i have 1 barrel please sent to my shop. I will paypal or venmo $ 17,0650.0 as quoted
Barani Krishnan
Barani Krishnan Jul 17, 2022 9:15AM ET
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You're trying to sound funny when it's no longer funny, Grasso. We had a typo that we fixed hours ago and it no longer even appears on the copy. You need to be a bit more creative.
Steven Collar
Steven Collar Jul 17, 2022 8:32AM ET
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Saudis buy oil from Russia for there use and then mark up their oil to sell to us.It just like us to buy Russian oil and pay extra to the Saudis for being middle man.
Barani Krishnan
Barani Krishnan Jul 17, 2022 8:32AM ET
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True, Steven
Joe Rizzuto
Joe Rizzuto Jul 17, 2022 7:44AM ET
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yet you still ignore the obvious- we have the biden harris et el admin who refuses to work amicably with domestic u.s. oil companies, the cleanest oil and gas production in the world, to insure the protections of the long term capital and labor (u.s. labor) investment necessary for domestic energy security...
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Barani Krishnan
Barani Krishnan Jul 17, 2022 7:44AM ET
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Matthew Petyk  Matthew Petyk The US industry was once incredibly competitive with Mom and Pop drillers doing exactly what the US spirit of competition called for. Sure, a price bust came because that's what competition does. It's like democracy. Never meant to be pretty and organized. When the Moms a d Pops got out of shale, the majors got in as they couldn't resist the long-time lure. Now that part of Big Oil, joined by the not-so-big-but-significant-oil comprising of the Pioneers are in bed with Aramco as they all collude to keep a barrel above $100. The gas crack is still around $40 making for very very good profit in cranking out gasoline. Enough of this b(s) of "oh the administration is hostile to US industry". Was Trump nice to immigration? No, right? He had to fulfill his campaign promise, right? Similarly, why can't Biden pander to people who brought him to office? As I told Joe, we know exactly why the industry wants to keep gas at above $4 and until Nov. Let's not kid ourselves.
Barani Krishnan
Barani Krishnan Jul 17, 2022 7:44AM ET
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Matthew Petyk  And before you go on talking about the wonders of oil, understand that without Ukraine, we might have never gotten to even $90. This is a once-in-a-lifetime event just like the pandemic. Enjoy whatever high prices you relish because another bust will come. That's what commodities are all about, and oil isn't immune from it.
Joe Rizzuto
Joe Rizzuto Jul 17, 2022 7:44AM ET
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sorry barani, you are over-ruled on this one. ppl are fed up with the gas lighting...
Barani Krishnan
Barani Krishnan Jul 17, 2022 7:44AM ET
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Joe Rizzuto  I'm sick as well with the oil lobby and its b(s), sorry
Joe Rizzuto
Joe Rizzuto Jul 17, 2022 7:44AM ET
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Barani Krishnan lol, not sorry
 
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