Energy & precious metals – weekly review and outlook

(C) Reuters.

By Barani Krishnan

Investing.com — So, was it just a gap that needed to be filled? Or was it reflective of demand worries ahead of recession winds? Whatever the case, there’s one less uncertainty on the oil market now after last week’s tumble in crude prices that finally filled the gap up open from April 3 forced by OPEC+’s production maneuver.

The question, of course, is where do we go from here?

If Friday’s near 3% spurt-up is any indication, then higher could be the answer.

Yet, with the coming week’s potential Fed rate hike – and more monetary tightening on the cards – hanging over markets like the proverbial Sword of Damocles, measured gains and volatility could be the way forth.

“Technical selling was not going to end until they filled the gap made from the OPEC+ production cut announcement earlier this month,” Ed Moya, analyst at online trading platform OANDA, said, referring to the near 6% tumble in crude prices between Monday and Wednesday alone before the late week rebound.

While fears of an economic slowdown were valid, the on-off-and-on-again bull market sentiment in oil will buck any overdone selloff, he added.

“The pulse of the U.S. economy is not too bad if you ask the Atlanta Fed and if the U.S. economy comes anywhere close to growing at 1.7% in the second quarter, oil prices will probably be much higher,” said Moya.

Notwithstanding such optimism, U.S. data of late has reinforced investor worries about a slowing economy.

The Commerce Department reported on Thursday that real gross domestic product, or GDP, grew at an annual rate of 1.1% in the first quarter of 2023 versus the 2.6% expansion in the fourth quarter of 2022. Economists tracked by Investing.com had expected a GDP growth of 1.9% for the first quarter.

U.S. jobless claims, meanwhile, fell unexpectedly by 16,000 last week to reach 230,000, the Labor Department reported in what would be another challenge to the Federal Reserve which needs unemployment numbers to rise to effectively fight inflation.

A consensus of economists had expected initial jobless claims to rise to 248,000 from the previous week’s revised level of 246,000. The drop reported by the Labor Department instead meant more inflationary pressure for the Fed to contend with.

To fight inflation, the Fed has added 475 basis points to rates in nine increases since March 2022. Rates now stand at a peak of 5%, compared with just 0.25% at the start of the coronavirus pandemic in March 2020. Another quarter-point hike, anticipated on May 3, will bump up rates to a peak of 5.25%.

Inflation itself, as measured by the Fed’s favorite price indicator – the Personal Consumption Expenditure, or PCE, Index – grew by just 4.2% in the year to March this year from a four-decade high of 6.6% in the 12 months to March 2022.

Despite the cooling in prices, annual inflation remains at more than double the Fed’s 2% target. The central bank has, thus, embraced rate hikes as the only proven way to fight the upward trajectory in prices. Besides the credit squeeze and the indirect hit on the economy from the Fed’s actions, the rate hikes have bumped up the dollar and weakened international demand for commodities priced in the currency, which includes oil.

After rallying to 14-year highs of around $130 a barrel for U.S. crude and nearly $140 for Brent at the height of the supply crunch fears generated by the Ukraine invasion, oil prices began a sure and steady decline, ending 2022 at a little over $70.

The selloff worsened in the first quarter of this year, with both crude benchmarks hitting 15-month lows as WTI reached under $65 and Brent almost broke below $70.

Global oil producers under the OPEC+ alliance then resorted to a production maneuver that added another $10 to the two benchmarks.

OPEC+, which groups the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 independent oil producers, including Russia, said it will cut a further 1.7 million barrels from its daily output, adding to an earlier pledge from November to take off 2.0 million barrels per day.

OPEC, however, has a long history of over-promising and under-delivering on production cuts. While the group achieved over-compliance on promised cuts in the aftermath of the 2020 coronavirus breakout, experts say that was more a result of battered demand that led to minimal production, rather than a will to cut barrels as pledged.

What OPEC is doing is using the power of the megaphone: Announce a cut, get a huge positive impact on prices, then produce what it really wants.

Despite that, the oil cartel doesn’t like being called out for its bluff.

In the just-ended week, OPEC got into a war of words with the International Energy Agency after the IEA, which looks after the interests of oil consumers, said surprise output cuts by the producer group risked exacerbating global supply deficits in oil and could scupper world economic growth.

In a Bloomberg TV interview on Wednesday, IEA Executive Director Fatih Birol warned that the Saudi-led OPEC should be “very careful” with its production policy, warning that the group’s short-term and medium-term interests appeared to be contradictory. He added that higher crude prices and upward inflationary pressures would result in a weaker global economy, with low-income nations likely to be disproportionately affected.

OPEC countered that the world’s leading energy authority should be “very careful” about undermining industry investments. The oil-producing group’s Secretary General Haitham al-Ghais said finger-pointing and misrepresenting the actions of OPEC and OPEC+ was “counterproductive.” He added that the influential group of 23 oil-exporting nations was not targeting oil prices, but instead focusing on market fundamentals.

“The IEA knows very well that there are a confluence of factors that impact markets. The knock-on effects of COVID-19, monetary policies, stock movements, algorithm trading, commodity trading advisors and SPR releases (coordinated or uncoordinated), geopolitics, to name a few,” al-Ghais said.

OPEC is also seething over an IEA call last year that oil markets were oversupplied, prompting the Biden administration to release a huge amount of crude from the U.S. reserve that pushed WTI to low $70 levels.

I guess the truth hurts in more ways than one.

Oil: Market Settlements and Activity

New York-traded West Texas Intermediate, or WTI, for June delivery shows a final post-settlement price of $76.63 per barrel on Investing.com, after officially closing Friday’s session at $76.78 – up $2.02, or 2.7%, on the day. For the week, the U.S. crude benchmark remained in the red, with a loss of 1.4%.

For all of April though, WTI showed a return of about 1%. It was the first positive monthly closing for WTI after five previous months of losses. Before that, WTI was only in the green for one month – October – after spending four prior months in the red.

London-traded Brent settled up $1.17, or 1.5%, at $79.45 on its June delivery contract, according to exchange data from ICE.

On Investing.com, Brent for July delivery, showed a final post-settlement price of $80.26, after officially closing Friday’s session at $80.33 – up $2.11, or 2.7%, on the day. For the week, the U.S. crude benchmark remained in the red, with a loss of 1.4%.

“If you were to factor in the better U.S. demand lately, it’s a deservingly mixed performance for a market that’s basically ridden more on OPEC’s overly-hyped production cuts that have fallen short on delivery,” said John Kilduff, founding partner at New York energy hedge fund Again Capital.

Oil: WTI Outlook

Despite Friday’s breakout move, the weekly price action in oil suggests a continuation of a bearish pattern for the coming week, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

The April 3 gap up open of $75.67 was not only filled but was also extended to a downside of $74 before WTI pulled back towards $77, noted Dixit.

“As such, going forth, any further bullish rebound will have to clear through the challenge of $79.30, which may open the door for the 200-day Simple Moving Average, or SMA, of $81.80, followed by the 50-week Exponential Moving Average, or EMA, at $82.20,” said Dixit. “Major resistance will be at $85.10.”

On the flip side, he cautioned that WTI’s failure to progress beyond $79.30 will likely cause a renewed decline towards $74, below which sits the confluence zone of the 200-month SMA of $72.80 and the 50-month EMA of $72.20.

“At this point, major support is seen at the 200-week SMA of $66.80 and the 100-month SMA of $60,” he added.

Gold: Market Settlements and Activity

Gold futures ended a notch higher for April, clinching the second straight monthly settlement in the positive as bulls kept the haven not too far from the key $2,000-an-ounce mark on bets that the dollar will fall again soon.

Gold for June delivery shows a final post-settlement price of $1,999.40 per ounce on Investing.com, after officially closing Friday’s session on the Comex at $1,999.10 – up just a dime on the day. The session high was $2,004. It was the second straight month in the black for the yellow metal and its fifth positive month in six.

The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, settled at $1,990.06, up $2.21, or 0.1%.

Both spot gold and Comex’s most-active contract for the yellow metal are down about 2.5% or more from an April 13 peak of around $2,050. The selloff in gold came as the dollar rebounded lately on expectations that the Federal Reserve will embark on a quarter point rate hike on May 3 when the central bank’s policy makers meet to review the effectiveness of U.S. monetary policy in fighting inflation.

In its battle against inflation, the Fed has added 475 basis points to rates in nine increases since March 2022. Rates now stand at a peak of 5%, compared with just 0.25% at the start of the coronavirus pandemic in March 2020. The quarter-point hike expected on May 3 will bump rates up to a peak of 5.25%. The dollar, a contrarian trade to gold, has been rising on these rate hike expectations.

Gold bulls are, however, banking that the Fed will be done soon with its rate increases, and are keeping gold closer to the $2,000 mark for a run toward a record high should the dollar crumble at that point.

“Wall Street is confident the Fed will raise rates next week, but it seems these latest inflation pressures may not allow them to signal they are ready for a pause,” said OANDA’s Moya. “The last few key data points leading up to the Fed could suggest the service sector is still healthy and that manufacturing activity is stabilizing.”

Moya said gold might not benefit too much from safe-haven plays related to the ongoing U.S. banking crisis though it could surge “if the Fed is comfortable enough to signaling they are reading to hold rates for a while.”

“Monetary policy is restrictive and as it filters through the system, we will start to see larger parts of the economy enter slowdown mode,” Moya added.

Gold: Price Outlook

Gold seems to have gained initial demand from the $1975-$1970 zone and the close above the 5-week EMA indicates that bulls aren’t willing to give up yet, said SKCharting’s Dixit.

But resuming the uptrend will require strong bullish energy to take out the daily Middle Bollinger Band of $2,000, said Dixit, adding that also needed will be a clear breakout above the descending channel resistance of $2,008.

If this scenario plays out, a bullish rebound will be confirmed, aiming to retest the swing high of $2,048 and immediate resistance of $2055, said Dixit.

“Failing to make a sustainable break above the $2,000-$2,008 level will cause a drop toward the $1,975-$1,970 support zone, which makes gold vulnerable to a renewed decline towards $1960 and the major Fibonacci level of $1,955, as well as the 50-day EMA of $1,951.”

Natural gas: Market Settlements and Activity

Natural gas futures returned to the green for April, finishing the month up nearly 9% while staying stuck to the mid-$2 level that has largely characterized this year’s pricing for America’s favorite temperature control fuel.

The most-active June gas contract shows a final post-settlement price of $2.398 per mmBtu, or million metric British thermal units. on Investing.com, after officially closing Friday’s session on the Comex at $2.41 – up 5.5 cents or 2.3% on the day.

The uptick in gas prices came after the latest weekly storage data for the fuel landed not too far from market expectations.

U.S. gas storage for the week ended April 21 rose by 79 billion bcf, or billion cubic feet, the Energy Information Administration, or EIA, reported on Thursday. Industry analysts tracked by Investing.com had projected an injection of 75 bcf for last week after all the burning done for power generation as well as for heating.

The latest weekly injection bumped up total gas inventories to 2.009 trillion cubic feet, or tcf, EIA records showed. At current levels, the gas storage stands at 35% above the year-ago level of 1.484 tcf and 22% higher than the five-year average of 1.644 tcf.

The debate on when the bearish tide would irrevocably turn has raged since gas prices began their headlong fall from 14-year highs of $10 per mmBtu, or million metric British thermal units, in August.

At brief intervals this year, the market had appeared to be on a cusp of a serious rebound – like in late February when it got above $3 after breaking below $2 earlier that month for the first time since September 2020.

Since the start of 2023, however, gas has not made a forceful break amid the mid-$2 level, which technical chartists say is critical if the fuel is to make a new upward trajectory.

“Temperatures are likely to start to warm in May, but until warmer temperatures closer to the 10-year normal there will likely be subdued demand,” analysts at Houston-based energy markets advisory Gelber & Associates said in a note on gas.

Natural gas: Price Outlook

Natural gas’s daily and weekly price action supports a rebound towards the immediate resistance of $3.00-$3.25, while the continuation of that momentum will depend on prices holding above the horizontal support of $2.15-$2.04, said SKCharting’s Dixit.

“Any pullback and downward shift can be used as an opportunity to add to longs, so long as $2.04 remains the active support,” he added.

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