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Energy & Precious Metals - Weekly Review and Outlook

Commodities Sep 25, 2022 05:30AM ET
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By Barani Krishnan

Investing.com - Oil bears have a ‘love-hate relationship’ with Abdulaziz bin Salman. They love to taunt the Saudi Energy Minister and he loves to hate them. 

Crude’s short-sellers, of course, find nothing personal in what they do; to them, it’s just business - like the Corleones. But it’s different with AbS. The half-brother to MbS - or Saudi Arabia’s king-in-waiting Mohammed bin Salman - internalizes his battles with the short side of the trade, and has vowed to crush those who come up against him and his beloved OPEC+ alliance. The just-ended week might have given the world a preview of another battle royale coming up between the two sides.

As U.S. crude settled Friday at below $80 per barrel for the first time since January for its worst weekly loss in seven, it became apparent that the notion of the four-month-long sell-off in 'black gold' ending soon might be just that: a notion.

When the rut began in June, New York-traded WTI, or West Texas Intermediate, was well above $100 a barrel. 

The first monthly settlement at double-digits came the next month, after back-to-back losses of 7% each in June and July. 

AbS and OPEC remained defiant then, projecting strong demand for their oil and barely seeing the need to take barrels off the market as they did at the height of the Covid pandemic two years ago, when they slashed almost 10 million barrels in daily exports. With the assent of their Big Brother of the past six years within OPEC+, Russia, the Saudis announced a haircut of 100,000 barrels per day reduction. 

The result was an even bigger 9% loss for WTI in August. 

September’s looming 11+% slide might be the proverbial last straw to test the back of the camel for the Saudi Energy Minister and his oil-producing brethren in the Middle East, as the long side of the market exhorts OPEC+ to do “something” when the alliance meets again Oct. 5.

That “something” is, of course, no mystery to anyone who has followed the workings of the original Organization of the Petroleum Exporting Countries over the past six decades. And that is to slash production forcefully, pandemic-style, to hopefully restore the sort of price wins seen in the 19 months prior to the market’s turn, when WTI settled up 16 times. 

Without it getting any worse, oil is already down almost 40% since the February invasion of Ukraine by Russia, which sent WTI to a peak of around $130 and global crude benchmark Brent to almost $140.  

“OPEC+ still believes that supply and demand fundamentals continue to support rising prices, but crude prices continue to fall,” Nigeria's Oil Minister Timipre Marlin Sylva said Thursday, speaking on behalf of the alliance, which groups OPEC’s original 13 with another 10 producers led by Russia since 2016. 

“We don't know exactly what we can do to fix this, but the only tool we have is to cut production if prices fall too low,” Sylva added.

Oil bears, of course, heard that. Minutes after the Nigerian oil minister spoke, WTI and Brent rose momentarily, before giving back even that momentum. 

As mentioned earlier, shorting oil is strictly business now for the bears; they are convinced that it’s the right thing to do. 

Fueling their conviction were global equities at a two-year low on Friday versus the dollar at 20-year highs, after weak European purchasing managers indexes and growth concerns from rate hikes by the Federal Reserve to the Bank of England.

"The market is clearly thinking economic slowdown," Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, said as recession fears were omnipotent across markets. "Whether or not physical [oil] grades are strong or weak matters not currently.”

Long-leaning analysts, however, warned that the risk of war escalation in Ukraine by Russia and China's opening up from COVID lockdowns could mean plenty of upside for oil in the coming weeks.

They also point to something else that in their view the bears are completely blind to: The daily release of one million barrels of crude from the U.S. Strategic Petroleum Reserve by the Biden administration. The total 180-million-barrel release that will end in October has practically flooded the U.S. market for crude and alleviated some of the deficit as well on the global market for oil from shortfalls in sanctioned Russian supply. When the SPR outflows run out in six weeks, oil will explode higher, many bulls are convinced.

Not so, say analysts at Ritterbusch and Associates, the Chicago-based oil consultancy formed by veteran oil trader Jim Ritterbusch, which believes that a continued surge in U.S. interest rates and the dollar will limit oil’s gains.

Here’s where the bulls and bears lock horns and paws, and AbS might be tempted to be the sweeping hawk flying down to be arbiter. 

As said earlier, the Saudi energy minister’s hatred toward short-sellers in oil is well established.

In a famous speech from September 2020,  AbS declared: “I’m going to make sure whoever gambles on this market will be ‘ouching’ like hell'.” He promised to make crude prices as “jumpy” as possible for those shorting them. For good measure, he called on the shorts in oil to “make my day”- a taunt used by Dirty Harry, a maverick cop, on the bad guys in the movies of the same name from the '70s and '80s.

Clearly, no other Saudi energy minister had engaged with traders at such an animated and intense level, with the game presumably made all the more enjoyable for AbS as oil bears indeed “ouch-ed” from prices that went from zero (WTI in April 2020) to almost $130 six months ago.

While everything was in AbS’ advantage once to slash production, things could be more complicated this time around. And that complication has largely to do with the biggest force within OPEC+ that the Saudis have relied on for the past six years: Russia.

Just like OPEC+’s only known response to a price crash is to cut production, Russia’s only known way to ease the pain of its self-inflicted crisis of sanctions is to deeply discount the price of its oil to customers willing to buy from it.   

Adding to this Russian crisis is the steady advance made by the Group of Seven nations to have in place by early December a working mechanism to cap the price of oil sold by Russia, in order to limit the Kremlin’s ability to fund its war against Ukraine. 

While Moscow has vowed retaliation against countries that implement the decision, it is also likely to undercut other OPEC+ producers in selling its oil wherever possible to make up for lost revenue. Russia’s aggressive discounting on oil on the physical market will ultimately matter on the futures market, aside from weighing on the pricing of competing OPEC+ oils, including Saudi crude.

Another open secret within OPEC+ is how cuts are divvied up and who does the giant’s share - typically - in supporting the market. History has repeatedly shown over the past six years that it's almost always the Saudis who cut the most, followed by the United Arab Emirates. 

“Here’s where things are going to get really complicated,” said John Kilduff, founding partner of New York-based energy hedge fund Again Capital. “Preserving Russia within OPEC+ is paramount to the Saudis as the alliance itself will collapse without the Russians. But how do you effectively support an ally through difficult times when the ally is increasingly becoming a liability?”

“Vladimir Putin’s actions might become more difficult for MbS to support, particularly when Russian Urals are landing at $20 a barrel lower than Arab light. Would you, as Saudi Arabia and the UAE, cut output, knowing that the Russians won’t as they need every penny from every barrel they can sell to fund the Ukraine war? Whatever the Saudis and Emiratis cut will end up as market share lost to Russia, U.S. and other producers who will be racing to sell anywhere there’s a vacuum in supply.”

We’ll know by Oct. 5 what AbS plans to do - maybe earlier, if oil’s “Dirty Harry” decides to pull the trigger quicker than wait.

Oil: Market Settlements and Activity 

New York-traded West Texas Intermediate, which serves as the U.S. crude benchmark, did a final trade of $79.43 on Friday, after settling the official session at $78.74 per barrel, down $4.75, or 5.7%, on the day. WTI earlier hit a session low of $78.14.

For the week, the U.S. crude benchmark was down 7.5% for its worst week since the end of July.

Brent, the London-traded global benchmark for oil, did a final trade of $86.65 and settled at $86.15, down $4.31, or 4.8% on the day, after an intraday drop to $85.51. 

For the week, Brent was down 5.7% for its biggest weekly decline since the end of August.

Oil: Price Outlook

Renewed selling is very likely in the week ahead in WTI as bears attempt to break the $78 low with the next bearish target of the 200-month Simple Moving Average of $72.35, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Four months of bearish oil trends dig its heels deeper as the monthly middle Bollinger Band of $82.20 is broken and WTI drops to $78.14, which is a close shave with the 100-week SMA of $77.50,” he said.

WTI’s Relative Strength Indicator and stochastics readings across the daily, weekly and monthly charts were all in negative formation, Dixit added.

MACD, or Moving Average Convergence Divergence, on the monthly chart has also started negative formation, pointing to further downside in WTI, he said. 

On the flip side, the 100-week SMA of $77.50 may act as support, causing a short-term rebound towards the broken-support-turned-resistance levels of $82.20 and $86.20, Dixit said.

“If prices make a sustained break above this zone, we expect recovery towards $90.50 - $91.50.”

Gold: Market Settlements and Activity 

There’s no escaping the wrath of the dollar, as gold traders are finding out.

One of the yellow metal’s most sacred support lines that held through its worst selling storms of the past two years - $1,650 an ounce - broke Friday as the Dollar Index continued with its onslaught of one 20-year high after another.

Bond yields, tracking the 10-Year U.S. Treasury note, scaled 12-½ year highs after the latest session peak above 3.8%. The yields reflect so-called real interest rates, or where the market thinks key lending rates set by the Federal Reserve would go.

The Fed on Wednesday raised rates by 75 basis points for a third straight month in a row, bringing key lending rates to a peak of 3.0% — or 0.8% below the bond yield level. To be sure, Fed Chairman Jerome Powell indicated there would be no let up for now in the central bank’s hiking cycle as it battles to bring inflation raging at above 8% a year to its long-standing target of 2% per annum.

Gold’s break below $1,680 “was a big deal but it hasn't really been the catalyst for anything since,” said Craig Erlam, analyst at online trading platform OANDA.

That makes a break of the $1,650 support “a secondary confirmation of the initial breakout” and a “very bearish signal”, he added.

Gold’s benchmark futures contract on New York’s Comex, December, did a final trade of $1,651.70, after settling the official session down $25.50, or 1.6%, at $1,655.60 per ounce. The session low was $1,648.60.

The spot price of bullion, which is more closely followed than futures by some traders, settled down $27.76, or 1.7%, at $1,643.57. Spot gold’s bottom for the day was $1,639.96.

Gold: Price Outlook 

Going into the week ahead, traders' reaction to $1,640 would be critical for spot gold, says Dixit of SKCharting.

“With spot gold cracking $1,640, it could go towards $1,620 next, or even $1,600,” he warned.

“However, if the Dollar Index starts to decline from 113 and heads towards 104, the $1,620-$1,600 zone in gold can attract value buyers. But $1,560, which sits at a 50% Fibonacci retracement of gold’s previous rally, is a more convincing rallying point that could bring bulls back to recent highs.”

As long as gold sustains above $1,640, a small recovery towards $1,655-$1,665, with an extension towards $1,678-$1,688 looks likely, said 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 (11)
Andrew Ulferts
Andrew Ulferts Sep 26, 2022 9:54AM ET
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This is a great article Barani. Nice work.
Big Eyes
Big Eyes Sep 25, 2022 6:31PM ET
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if russia could use earned dollars, then yes, they would sell to earn. But they can’t use them because all kind of export is blocked for them. So why would then make fire sell?
Barani Krishnan
Barani Krishnan Sep 25, 2022 6:31PM ET
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Because they still need to eat.
Barani Krishnan
Barani Krishnan Sep 25, 2022 6:31PM ET
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And fund their goddamned war. Sorry, I couldn't be more polite.
Brad Albright
Brad Albright Sep 25, 2022 6:31PM ET
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It's hard not of be frustrated with the obtuse.
Alan West
Alan West Sep 25, 2022 3:17PM ET
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Gold has broken double top support. It could feasibly go to US$1,400…..or lower.
murali chigurupati
mc99 Sep 25, 2022 2:37PM ET
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Very good article. Thank you.
Barani Krishnan
Barani Krishnan Sep 25, 2022 2:37PM ET
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Thanks much, mc99., Have a good weekend.
anupam pandey
anupam pandey Sep 25, 2022 11:03AM ET
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Bsrani ji namaskar! I really like your article about PM. it is helpful to determine the level And make position in Gold. thanks
Barani Krishnan
Barani Krishnan Sep 25, 2022 11:03AM ET
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Anupam jee, namaskar as well. Thanks much. It's readers like you who keep me going. Bests and a great weekend to you.
Ioannis Dislias
IoannisDislias Sep 25, 2022 10:21AM ET
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Back to $90 from Monday!
Brad Albright
Brad Albright Sep 25, 2022 10:20AM ET
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Another great article, Barani. Do you have any insight into whether Russia is unloading gold?
Barani Krishnan
Barani Krishnan Sep 25, 2022 10:20AM ET
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Thanks much, Brad. Possibly. Gold's coming to the $1,650 mat be driven by some Russian liquidation of bullion or -- at this point -- fears that could happen soon. I'll explore more in coming days. You have a good weekend, mate.
Yann Windermere
Yann Windermere Sep 25, 2022 9:59AM ET
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Interesting but forgot one fact that the Russian prefer to discount their barrels from $100 to $80 than from $70 to $50 so they will support OPEC cut
Barani Krishnan
Barani Krishnan Sep 25, 2022 9:59AM ET
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Good logic. But "support" from your view will mean making cuts. I'm not sure if the current Russian position actually allows them to risk any cutting. Even if a cut is is announced with their participation, the market will want to see proof of it. Sure, oil prices might surge overnight on news of an OPEC cut. But after some time, the trade will be itching to see numbers to prove those cuts. As it is , OPEC+ hasn't met promised quotas for months.
Joe Rizzuto
Joe Rizzuto Sep 25, 2022 9:14AM ET
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stop doing business with ur enemies. as soon as you can. nothing else matters.
Barani Krishnan
Barani Krishnan Sep 25, 2022 9:14AM ET
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Who should stop doing business with who, Joe? Iran isn't in this story.
Clay Douglass
Clay Douglass Sep 25, 2022 8:09AM ET
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biden is a bum.
Barani Krishnan
Barani Krishnan Sep 25, 2022 8:09AM ET
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He has practically brought an excellent working relationship in oil between the Saudis and Russians to its greatest test ever, and he's a "bum" to you. Explains your level of intelligence in a debate.
Brad Albright
Brad Albright Sep 25, 2022 8:09AM ET
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A bum? If that is the word you use for an honest and decent man dedicated to traditional American values of justice, fairness and individual freedom, then sure, Biden is a bum.
TERRY HOUGHTON
TERRY HOUGHTON Sep 25, 2022 8:09AM ET
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As far as Biden being a bum, I don't necessarily agree with that. But on the other hand I do think he is a delusional puppet of the left, and is spending our nation into a hole we my never get out of. All on the backs of the middle class.
 
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