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Energy & Precious Metals - Weekly Review and Outlook

Published 09/11/2022, 05:21 AM
Updated 09/11/2022, 07:19 AM
© Reuters.

By Barani Krishnan

Investing.com - Let’s take a moment to say a prayer in memory of all of those who gave their lives on this fateful day 21 years ago. To the victims of 9/11, you live on in our hearts.

Thank you. Now, back to the business of energy and precious metals and the week that was. 

For those surprised with how much gasoline prices had fallen at the pump since the height of summer demand — from a record $5.01 a gallon in mid-June to below $3.50 in several spots in the U.S. East Coast this weekend — here’s some news: Those prices could fall further.

John Treanor, a spokesman at the American Automobile Association, told Salt Lake City, Utah-based station KSL-TV that the price at the pump is expected to drop even more as we head into colder months. 

Treanor said customers could see a decrease of 7 to 10 cents per gallon when gas switches from a summer blend to a winter blend.

"In the winter months, what's called the Reid Vapor Pressure — it's a gauge that the EPA uses to regulate how much emissions your fuel can have — changes. In the winter months that range can be higher," Treanor said. 

The EPA refers to the Environmental Protection Agency, which is tasked with environmental protection matters.

While the forthcoming fuel blend switch at the pump may be even friendlier to consumers’ wallets, the drawback might be a slight hit to the environment — in terms of air quality, that is. EPA regulations passed in 1990 allow more butane in gas during winter months and that makes the gas less expensive.

"That means you can put more butane in,” said Treanor, explaining. “Butane is essentially a filler there. It helps your fuel burn a little faster, burn a little hotter, but it does cause more vapor.”

Treanor’s remarks come after comments by Patrick De Haan, head of petroleum analysis for GasBuddy, who told TheStreet a few weeks ago that prices in a few states could even drop below $3 soon. The states most likely to benefit from such a steep dip would be Texas, South Carolina, Oklahoma, Georgia, Arkansas, Tennessee, Mississippi, Alabama, Louisiana and Kentucky.

Such a circumstance would put prices lower than this time last year, when the national average was $3.18 for regular unleaded, based on AAA figures.

Why are gas prices falling? 

Pump prices are primarily determined by the price of crude oil, which varies based on supply, consumer demand and other factors. Taxes also play into prices, and many states have enacted “gas tax holidays” this summer to help consumers fill their tanks.

Leaving taxes aside, let’s look at the price of crude first. From its March 7 peak of $139.13 a barrel two weeks after the invasion of Ukraine and the start of Western sanctions on Russia that caused the global upheaval of commodities, Brent hit a seven-month low of $87.25 in the just-ended week. While it ended the week higher at $92.84 a barrel, it was still down some $46, or 33%, from its March peak.

U.S. crude’s West Texas Intermediate benchmark, hit a seven-month low of $81.20 per barrel but settled the week at $86.79. That was still down almost $44, or 34%, from its March 7 peak of $130.50.

Demand-wise, U.S. crude stockpile numbers have been quite volatile in recent months, though leaning bearish of late.

Crude oil inventories rose by 8.844 million last week, the highest for a week since the week ended April 8, when there was a build of 9.382 million. Industry analysts tracked by Investing.com had expected a crude drawdown of 250,000 barrels instead for last week. The crude build indicated weakening demand for fuels with the winding down of the peak summer travel period.

Inventories of gasoline, America’s top automobile fuel, climbed by a modest 333,000 barrels against expectations for a draw of 1.667 million barrels.

Stocks of distillates — the oil variant required for making the diesel needed for trucks, buses and trains, as well as the fuel for jets — rose by 95,000 barrels, less than the rise of 530,000 that had been expected. 

Exports of U.S. crude, another important component of the weekly data, slowed to 3.433 million barrels per day (bpd) last week from the prior week’s 3.967 million bpd.

But analysts — especially oil bulls — contend that statistics on crude have been messed up by the release of tens of million barrels from the U.S. emergency stockpile, or Strategic Petroleum Reserve, known as the SPR. 

The SPR again saw a large outflow of 7.5 million barrels last week that brought the stockpile there to 442.5 million — its lowest since November 1984. 

The Biden administration has been drawing down the SPR since November 2021 to make up the shortfall in crude supply on the domestic market for fuels. But outflows from the reserve really accelerated in May when the administration embarked on a battle to bring down the spiraling pump price of gasoline that had bumped US inflation to 40-year highs. 

The president has committed to draw down 180 million barrels from the reserve over a six-month period — or roughly one million barrels per day — between May and October.  

At latest count, the SPR had released a total of 173.8 million barrels since March, a figure that includes volumes associated with an earlier round of tenders, Bloomberg reported on Thursday.

Which brings us to the question of what happens after October. Those long oil are betting the house that post-October, when excess crude hanging over the market clears, the WTI price for a barrel would shoot back to above $100 — with Brent fetching about $10 more than whatever the U.S. benchmark does.

This week, it appeared initially that the Biden administration might hamper those bets when Energy Secretary Jennifer Granholm told Reuters in an interview that the SPR drawdowns might be extended beyond October. But White House officials, speaking anonymously, told CNN later that there were no plans as of now to continue with SPR withdrawals after October.

Besides the end of SPR drawdowns, oil bulls might benefit from the increasingly bellicose position of Russian President Vladimir Putin towards the West for its ever-tightening sanctions against his country. 

Furious with the latest G7-endorsed cap on the selling price of Russian oil, Putin is eager to hit back and hurt the U.S. and its allies in the most painful way possible. His plan, which almost everyone other than probably his gardener knew from day one, is to shut all oil and gas supplies to the world. Such action would presumably send oil prices spiraling back to high $100s. But some analysts say the global economy, especially Europe’s, is almost certain to go into an unmitigated recession in such a case, and that could bring energy prices back down. 

Also, some meteorologists are cautioning that a warmer-than-usual start to the 2022/23 winter could result in more surprises for oil bulls.

The National Oceanic and Atmospheric Administration recently announced that there was a 91% chance that La Niña conditions would stay in place through November with a 53% chance of La Niña continuing through March 2023. 

During the winter, La Niña events typically bring warmer and drier weather to North Texas. Warmer than normal waters in the Gulf of Mexico can help increase the warmth of the air and moisture content, fueling strong storms.

There’s just no easy way out for either side on this.

Oil: Market Settlements and Activity 

U.S. crude’s WTI did a final trade of $86.10, after settling Friday’s official session up $3.35, or 3.9%, at $86.79 per barrel. For the week, WTI was off by just 8 cents or less than 0.1%. Prior to the rebound, it hit a seven-month low of $81.20 this week, pulverized by new Covid-19 lockdowns in top oil importer China.

London-traded Brent, which serves as the global benchmark for oil, did a final trade of $92.42 after settling the official session up $3.69, or 4.1%, at $92.84.  For the week, it was off by 18 cents or 0.2%. Prior to the rebound, Brent hit a seven-month low of $87.25 this week.

Oil: Price Outlook

WTI continues to remain bearish for the fourth month in a row and for more than ten weeks, with WTI settling below the weekly middle Bollinger Band, noted SKCharting.com’s chief technical strategist Sunil Kumar Dixit.

Weekly stochastics have been struggling to rebel out of long oversold territories, Dixit said, although he added that this week’s drop to $81.20 witnessed some resilience as prices rebounded from the monthly middle Bollinger Band of $82.50.

“A short-term rebound towards the daily middle Bollinger Band of $89.40 is a high probability,” Dixit said.

“If WTI makes a sustained break above a swing high of $90.40, we expect a further upside towards the 50 Week EMA of $92.35 and the 50 Day EMA of $93.90 followed by the 200 Day SMA $96.40,” he said, referring to the Exponential Moving Average and Simple Moving Average, respectively.

But he said the risk of a further drop wasn’t over yet, either. 

“On the downside, weakness below $82.50 will call for a drop to the 100-Week SMA of $76.70,” Dixit said. “However, bears may prefer to wait for better positioning, when prices approach the 200-Day SMA of $96.40, before pulling the trigger.”

Gold: Market Settlements and Activity 

Gold had its first weekly gain in four as the dollar retreated further on Friday from its biggest rally in two decades, allowing bullion to somewhat reinforce its standing as a safe haven.

The benchmark gold futures contract on New York’s Comex, December, did a final trade of $1,727.60 per ounce, after settling Friday’s official session up $8.40, or 0.8%, at $1,728.60. For the week, it gained 0.3% after a cumulative 5.2% loss over three previous weeks.

The Dollar Index, which pits itself against six major currencies led by the euro, slid for the third day in a row, reaching a low of 108.35 from Wednesday’s 20-year high of 110.79. The greenback slid even as Federal Reserve officials pushed on Friday for another outsized rate hike to keep inflation down, when the central bank meets on Sept. 21.

The spot price of bullion, which is more closely followed than futures by some traders, was last traded at $1,717.62, up $9.03, or 0.5%.

“Gold is higher as the historic run higher in the dollar appears to have run out of steam,” said Ed Moya, analyst at online trading platform OANDA.  “It seems Wall Street is getting comfortable with the idea of another 75-basis point rate hike by the Fed.”

Gold: Price Outlook 

SKCharting’s Dixit, who tracks spot gold instead of futures, said the risk of a further drop to the 200-Week SMA of $1,675 and the 50-Month EMA of $1,672 remain on the cards.

“Gold's rebound attempts from $1,688 has witnessed a cautious approach from buyers as prices tested $1,730,” Dixit said. “Gold needs to break above or below the $1746-$1688 range of the previous week.”

He referred to Tuesday’s scheduled release of the August Consumer Price Index as one that may have a major say in gold’s price move for the coming week. 

“In the short term, a sustained move above $1,712 indicates buying towards $1,728 and the 5-Day EMA of $1,732. A sustained break below $1,712 indicates sellers are pushing gold towards $1,705 and $1,700, below which $1,690 can be tested.”

“Gold actually needs to clear the $1,750-$1,760 zone in order to reclaim the $1,800-$1,808 swing top.”

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

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