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Energy & Precious Metals - Weekly Review and Outlook

Published 08/21/2022, 05:15 AM
Updated 08/21/2022, 05:18 AM
© Reuters.

By Barani Krishnan

Investing.com -- Forget whatever you read about oil before Friday’s market close.

Because all that matters probably happened some 30 minutes after the settlement - the news of it, that is. If what oil bulls read about Iran earlier in the week had given them some consternation, then the late breaking news might have made them jump out of their skins.

Here’s what at least one headline on Iran, that surfaced on Al Jazeera, said late Friday: “Iran nuclear deal ‘imminent’ with crippling sanctions removed”.

Anyone who’s followed the Iran saga long enough will know the never-ending plot twists that follow as each round of negotiation seems to lead to a climax.

The Al Jazeera headline, at a glance, appeared to be no better. But like all things complicated, the “devil is usually in the details” and in this case too, it was in the sixth paragraph of the story that read:

“According to sources with knowledge of the matter, the proposal stipulates on the day after the agreement is signed, sanctions on 17 Iranian banks as well as 150 economic institutions will be lifted.”

Instant sanctions removal is something Iran has been demanding since the start of its negotiations with the Biden administration 20 months ago. The White House’s response until now has been about the same: Roll back all your uranium enrichment and prove that you aren’t building a nuclear bomb. Then we’ll talk sanctions.

Now, however, the U.S. has “approved” the European Union’s so-called final text proposal for the re-establishment of the 2015 nuclear accord between Iran and six world powers. The new deal will be carried out in four phases over two 60-day periods, sources with knowledge of the proposed agreement told Al Jazeera.

That’s not all.

The sanctions release for Iran includes the release of billions of dollars in frozen Iranian funds and oil exports in return for the scaling back of its nuclear program.

This is another major development where Iran is concerned.

Some 12 million to 14 million barrels of Iranian crude are estimated to be held as “bonded storage” in Chinese ports, awaiting the U.S. go-ahead for them to be put to commercial use. The oil made its way to China before the re-imposition of sanctions on Iran by Trump. China keeps the crude in “bonded storage,” which means the oil has not been cleared through Chinese customs and is not being used, therefore not yet violating the sanctions.

About $7 billion worth of Iranian funds are stuck in South Korean banks under the sanctions imposed by Washington. Previously, it was reported that this could be released in exchange for the release of Western prisoners held in Iran. It is not known if that arrangement is still in place, or whether the prisoner exchange deal itself had been dropped for Iran to get back what’s rightly its money.

If the latter is true, why the sudden change of stance by the U.S.?

It could have to do with an even more explosive headline, one run by CNN.

According to the broadcaster, Iran has dropped its demand that the U.S. stop listing the Iranian Revolutionary Guard Corps as a terrorist organization under the State Department’s watchlist. That demand, like the instant sanctions removal, has been one of Iran’s sticking points that have held up the reinstatement of the 2015 nuclear deal.

The Revolutionary Guards Corp is Tehran’s elite force that goes by the IRGC acronym and is blamed for many terror acts around the world.

"The current version of the text, and what they are demanding, drops it," said the Biden administration official who spoke to CNN, noting that the US had repeatedly and consistently rejected Iran’s demand. "So if we are closer to a deal, that's why," the official added.

In our Aug 17 analysis on the Iran nuclear deal, we laid out the impact that a fast reinstatement of the Iran nuclear deal would have on the oil market.

If Iranian oil returns promptly to the market - analysts at ING say there’s a potential for Iran to bring some 1.3 million barrels per day to the market over time - it could put commensurate weight on crude prices over the coming months, said Ed Moya, analyst at online trading platform OANDA.

“We’ve been here before and have seen talks fall apart,” said Moya. “What is a little different this time is that it seems the Iranians are willing to discuss the terms. If the Iran nuclear deal is revived, that could send oil prices down to the low $80s.”

So, what will hold crude prices up? An OPEC production cut? The secretary-general of the Organization of the Petroleum Exporting Countries hinted earlier this week that a cut might be coming.

With 13 original members led by Saudi Arabia - before its alliance with Russia and nine other oil producers - the extended OPEC+ group has been raising production over the past year since slashing it from May 2020 in the aftermath of the coronavirus breakout that decimated demand for oil.

While this year’s production hikes were initially insulated by Russia’s invasion of Ukraine which sent crude to 14-year highs of between $130 and $140 a barrel by early March, OPEC+ has become more vulnerable of late as a market downturn since May has persistently driven prices lower.

Crude prices jumped almost 4% on Thursday on speculation of an impending OPEC production cut. But the rally did not get very far as the Dollar Index jumped the next day to a five-week high of 108.14, dampening risk-taking in oil and other commodities.

“For the past four years since the sanctions were imposed on Iran, OPEC has been trying to find the right strategy to deal with the eventual return of Iranian barrels to the market,” said John Kilduff, partner at New York energy hedge fund Again Capital. “A production cut seems to be a natural course of action for OPEC if Iranian barrels tip the fine balance in the market. Yet, who among OPEC will cut? That’s the question. Saudi Arabia? Russia? Who will give up their market share?”

Iran’s revived nuclear deal could trigger greater competition among OPEC members for market share. With the return of a hungry and competitive Iran to the crude market, OPEC production policy, as we know it, might see a radical change.

One theory is that the alliance’s individual members might produce more to compete with Iran, depending on how much oil it brings to market. At the height of non-sanctions years, Iran produced as much as 4 million barrels daily at one point, though its capacity now is more likely at 2 million.

The other theory is that the Saudis offer an olive branch to their long-time archrival Iran, convincing the Islamic Republic to join OPEC+ in “balancing the market” with responsible production. This idea was floated as early as February by OPEC as a means to prevent intense rivalry for market share upon the end of the Iran sanctions.

“Since the pandemic, the Saudis have very carefully distributed the cuts and production gains within OPEC. But if Iran makes a legitimate return to the market, it will likely not participate in any OPEC cuts. There has been talk of OPEC courting Iran to make it conform to the struggles of the rest in the group. However, I suspect the arch-enmity between the Iranians and the Saudis will prevail instead.”

Oil: Market Settlements and Activity

West Texas Intermediate, the benchmark for U.S. crude, did a final trade of $89.97 on Friday after officially settling the session at $90.88, up 27 cents, or 0.3% on the day.

The session high for WTI was $92.08, which if maintained, would have given WTI a gain of 1.7% on the day.

Instead, the modest bump at the close also left the U.S. benchmark down 1.3% on the week.

Brent, the London-traded global benchmark for crude, did a final trade of $96.09 on Friday after settling the official session at $96.72, up 13 cents, or 0.1%, on the day.

Brent’s session high was $97.84, which if held, would have given the global crude benchmark a gain of 1.3% on the day.

For the week, Brent was down 1.5%.

Oil: WTI Technical Outlook

WTI could head to as low as $77 if its upside is broken and a full-fledged selloff sets in for the coming weeks, said Sunil Kumar Dixit of SKCharting.com.

“Going into the week ahead, WTI faces challenges from a confluence area of 50-Week Exponential Moving Average of $92.80 and the 5-Week EMA of $93.70,” said Dixit. “If this zone is breached successfully, we can see a quick test of the 50% Fibonacci level of $96.47. This 50% and 61.8% Fibonacci retracement zone often works for short term trend reversal.”

Dixit said strong momentum above $96.47 can bring a scenario where oil makes a short-term rebound towards $104.50.

“Failure to make sustained break above or rejection from $93.70 - $96.47 may expose WTI to a monthly middle Bollinger Band of $80.90 and the 100-Week Simple Moving Average of $77 which measures the 78.6% Fibonacci level.”

Gold: Market Settlements and Activity

Gold fell almost 3% for the week as mixed data raises questions on whether the fledgling U.S. recession will deepen or the dollar will pick up steam again as the Federal Reserve weighs more outsized rate hikes.

The benchmark gold futures contract on New York’s Comex, December, did a final trade of $1,760.30, after settling the official session at $1,762.90 per ounce, down $8.30 or 0.5%. For the week, December gold lost almost $53 or 2.9%.

The spot price of bullion, more closely followed than futures by some traders, did a final trade of $1,747.06, down $11.39 or 0.7%.

Until last week, a four-week run-up had given both gold futures on New York’s COMEX, as well as the spot price of bullion, a gain of about $120 or 7% from July 21 lows of around $1,680. The yellow metal peaked at almost $1,825 on August 10.

But the grind lower has started for gold. The question is how much lower it could get. Surprisingly, both chart signals and views of fundamental analysts indicate that it will not be very much lower.

This is because of the inflation dynamic that’s tied to the stronger US data that has been emerging over the past week. All said, gold remains as a hedge against inflation for some of the most serious investors, although it has not been able to really live up to that billing since hitting record highs of above $2,100 in August 2020.

Gold: Price Outlook

SKCharting’s Dixit said gold’s correction could extend to $1,708 if its downside momentum is not arrested.

“With a sharp and one-sided sell-off for five consecutive days, gold lost $62 this week and its Daily Stochastics at 2/8 had turned extremely oversold calling for a rebound, either from a 50% Fibonacci level of $1744.34 or after the extended drop towards $1729.34.”

“A break below $1,729 will cause a deeper correction and a retest of $1,708.”

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

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