By Barani Krishnan
Investing.com - “I advise you to enjoy the sun... It will be a sunny day, and it will remain so,” Saudi Energy Minister Abdulaziz bin Salman quipped to a reporter as he walked toward the OPEC building in Vienna on the morning of Oct. 6 to open the first on-site meeting of the oil cartel and its allies since the 2020 outbreak of the coronavirus pandemic.
Six weeks later, one wonders how much of a sunny disposition Abdulaziz is in over the oil market.
OPEC+ - the alliance that bands OPEC, or the 13-member Saudi-led Organization of the Petroleum Exporting Countries, with 10 other oil producers steered by Russia - agreed at its latest meeting to slash production by 2 million barrels per day in order to boost Brent and U.S. crude prices that had fallen sharply from March highs.
Right after that OPEC+ decision, London-traded Brent went from a low of around $82 a barrel to almost $100 within days (it hit almost $140 in March) and while New York-traded West Texas Intermediate, the U.S. benchmark, rose from $76 to $96 (WTI was just over $130 in March).
But by Friday though, Brent had registered a six-week low of under $86 while WTI had gone beneath $77 (both benchmarks closed well off the day’s lows, although they had deep losses for a second straight week, with WTI’s latest weekly deficit being in the double digits).
The tumble came as oil bulls faced a perfect storm from an explosion of Covid cases in China, a fresh hawkish tilt by the Federal Reserve and easing supply worries.
All these were present even back in October when OPEC+ made the call for the 2 million barrels per day production cut - which, incidentally, was the largest reduction of its kind in two-and-a-half years (back in April 2020, the alliance executed a 10 million-bpd cut after the first major Covid-19 outbreak).
If these negative drivers had been in place all along, then what has changed? Basically nothing, except that China is - or fears it will be - experiencing Covid again just as it did three years ago.
From a macro view, China is battling coronavirus outbreaks in numerous major cities, including Chongqing and the capital Beijing, while it takes steps to try to ease the burden of its strict zero-Covid policy, which has caused severe economic damage and widespread frustration nearly three years into the pandemic.
For a more granular picture, several Chinese refiners have asked Saudi Aramco (TADAWUL:2222) to reduce December-loading crude oil volumes, two sources close to the matter told Reuters last week, as Covid restrictions and a faltering economy have weakened fuel demand in the world's biggest oil importer. The refiners had reportedly sought to trim supplies for December by about half of the previous month's level.
With all the negativity in the market, “could OPEC+ go even further [with production cuts] if the outlook continues to deteriorate when it meets again in a couple of weeks?” Craig Erlam, analyst at online trading platform OANDA, asked in an oil market commentary he issued Friday.
OPEC+ meets on Dec. 4 to review its production policy - just before the start of the Dec. 5 “price cap” on Russian oil, which is widely expected to be a market-boosting event for crude, given that the EU-G7 engineered initiative will theoretically lead to reprisals from Moscow.
U.S. President Joe Biden had even called the OPEC+ cut a “disappointment” that was “unnecessary” and said that there would be “consequences” for it (hinting at diplomatic and other political repercussions for long-time Gulf ally Saudi Arabia). As of Friday, the White House said nothing about the near 100% reversal of the oil market to October’s lows, despite the production cut having kicked in, in theory, over the past three weeks.
Some analysts think Saudi Arabia - the only nation with the perceived ability to hike and cut crude exports at its will - might not be able to go too far from November’s cut.
“Not so sure KSA has much of a hand to play,” Art Berman, an energy analyst said, referring to the Kingdom of Saudi Arabia. He said the kingdom would probably be “more effective at flooding the market than starving it in the past”, adding that it was also “super-aware of maintaining its role as an honest & reliable supplier, unlike Russia”.
In another tweet labeled “Aramco Theater”, Berman played down state-owned Saudi oil company Aramco’s caution that world oil capacity remained at ‘extremely low’ levels - a reminder to the oil trade that crude prices should be correspondingly higher.
“The world should be worried’: Saudi Aramco…has issued a dire warning over 'extremely low' capacity,” Berman wrote mockingly. “It has been “extremely low” for the last decade except for the two years of COVID.”
Talk is also growing that the Group of Seven-European Union engineered Russian oil price cap-import embargo, which market bulls expect to lead to an even bigger crunch in global supply, will only result in a fleeting price rally.
“That’s because Russian barrels will likely get rerouted and not taken off the market,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “That’s exactly the wish of the U.S. and its allies - that Putin earns considerably less for the same volume of Russian oil floating around the market.”
Yes, things don’t really look that sunny for the Saudis, Russians, OPEC+, or even oil for the moment. But being one of the world’s most volatile and politicized commodities, don’t expect it to stay down for too long.
Oil: Market Settlements and Activity
Crude prices entered “contango” mode - a market structure that defines weakness - the first time since 2021 and finished with a weekly loss of as much as 10% as China’s Covid headlines, new hawkish signals from the Federal Reserve, and easing supply worries all came to a head for oil bulls.
The front-month December contract for the U.S. crude benchmark West Texas Intermediate, or WTI, did a final trade of $80.11 per barrel after officially settling Friday’s session at $80.08, down $1.56, or 1.9%, on the day. December WTI remained well below the $80 support level for much of the day, hitting a 6-week low of $87.62, before paring losses just before the close.
The front-month contract also traded at a discount to the January 2023 contract at one point. While the so-called contango difference between the contracts was meager, it represented a structural oil market weakness where buyers wishing to hold a position in WTI at the time of contract expiry would pay more to switch to a new front-month contract.
Meanwhile, the front-month January contract in Brent, the global oil benchmark, did a final trade of $87.74 per barrel after officially settling Friday’s session at $87.62 a barrel, down $2.16, or 2.4%, on the day. Like WTI, January Brent was also at a contango to February Brent earlier.
On a weekly basis, WTI finished down 10%, adding to last week’s deficit of nearly 4%. Brent was off 8.7% for the current week, after last week’s slide of 2.6%. In terms of contract lows, WTI’s session bottom of $77.23 and Brent’s intraday low of $85.81 both marked a trough since Sept. 28.
Oil Price Outlook: WTI
This is WTI’s second rejection from $93.50 highs in the past seven weeks since recovering from September’s $76 lows, noted Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“Also this is the 2nd breach of 100 week SMA of $81,” he said, referring to the Simple Moving Average in the U.S. crude benchmark.
Dixit said any recovery from the recent drop will be limited to within the $83-$87 range and need to breach $93, for a reversal to the north of the 90s.
He said WTI’s weekly Relative Strength Index at 40.6 is below neutrality at 50, while the weekly stochastic is at 18/50, advocating further declines.
"These put WTI’s immediate bearish targets at the 200-month SMA of $72.55, followed by the 50-month EMA of $71,” Dixit added, referring to the Exponential Moving Average.
Gold: Market Settlements and Activity
Could the naysayers to the gold rally be right again?
'Fed superhawk' James Bullard’s comments that higher-for-longer interest rates will be the only way for the Federal Reserve to effectively bring inflation back to its 2% target knocked gold off its near $1,800-an-ounce perch, sending the metal with other risk assets like oil and stocks lower for the week as the dollar rebounded from last week's lows.
Bullion settled less than 1% down on the week and just about half a percent lower for Friday, keeping its $1,750-an-ounce support intact. But the market steam from last week that gave gold futures their best week in 30 months seemed to be evaporating, said traders.
U.S. gold futures’ benchmark December contract did a final trade of $1,752.00 after settling Friday’s trading down $8.60 at $1,754.40 per ounce on New York’s Comex.
For the week, it fell $15. Last week, Comex gold rose $92.80, or 5.5% - its most for a week in two-and-a-half years since a 6.5% jump during the week to April 3, 2020.
The spot price of bullion, which is more closely followed than futures by some traders, did a final trade of $1,750.84, down $9.38, or 0.5%.
The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, was up 0.7% on the week. It tumbled 4% last week on expectations that the Fed might opt for smaller-sized rate hikes going forth -- a notion Bullard virtually killed.
“I’m not really that bullish on gold anymore,” said Phillip Streible, chief market strategist at Blue Line Futures in Chicago. “Like most, I was expecting a clear break above $1,800. But that didn’t come, and it probably won’t after what Bullard said.”
U.S. inflation remains “unacceptably high” for the Fed to ditch jumbo-sized rate hikes in favour of only smaller increases, Bullard, who is president of the St. Louis Federal Reserve Bank, said Thursday.
“Thus far, the change in the monetary policy stance appears to have had only limited effects on observed inflation,” Bullard said in an analysis by the St. Louis Fed that debated the appropriate rate regime for the central bank after six increases since March.
Inflation, as measured by the Consumer Price Index, or CPI, expanded by 7.7% during the year to October, growing at its slowest pace in nine months. Prior to that, the CPI grew by 9.1% during the 12 months to June, its fastest in four decades.
The drop in the CPI came after the Fed added 375 basis points between March and November to rates, which were previously at just 25 points. Despite the central bank’s aggressive bid to get prices down, the CPI remains at more than three times the target of the Fed, which has vowed to bring inflation back to its 2% target.
Most economists, however, think the easing CPI will prompt the Fed to opt for a 50-basis rate hike in December, after four back-to-back increases of 75 basis points between June and November.
Bullard noted that the central bank’s policy-making Federal Open Market Committee, or FOMC, was seeking a future rate regime that would be “sufficiently restrictive”.
“While the policy rate has increased substantially this year, it has not yet reached a level that could be justified as sufficiently restrictive, according to this analysis, even with the generous assumptions,” Bullard said. “To attain a sufficiently restrictive level, the policy rate will need to be increased further.”
While Bullard did not specify what the future rate should be, he noted that there were currently ‘generous’ assumptions that favored a more dovish policy over a more hawkish one.
Bullard also said he would prefer rates to reach a peak of at least between 5% and 5.25% before a pause could be considered. Rates currently stand at a high of 4%.
On the question of disinflation, he said market pricing suggests this was likely to occur some time in 2023.
Analysts said Bullard, who has garnered the reputation of a Fed superhawk, had clearly knocked the wind out of gold’s sails.
“It seems bullion traders are listening to the latest Fed speak more so than stock traders,” said Ed Moya, analyst at online trading platform OANDA. “The economic data is telling the U.S. a mixed picture right now, but large parts of the labor market and factory activity resilience suggests inflation could be sticky next quarter, which could support the hawks at the Fed.”
Moya also said the path of least resistance for gold was lower and that could continue if the FOMC meeting minutes from November, due imminently, support the idea that December’s rate could still be hawkish. Comex gold got to as high as $1,791.80 on Tuesday, its highest since Aug. 12. It has given back about $37, or 2%, from that peak.
“The Fed will want to keep all tightening options available, and they will likely say that a half-point rate increase doesn't mean they are at the end of their tightening cycle,” Moya added.
Gold: Futures Price Outlook
Gold's strong rebound has paused before the monthly Middle Bollinger Band of $1,796 and daily stochastics are rebalancing from overbought areas of $97/98, as the need for momentum distribution arises, said SKCharting’s Dixit.
“This brings some price correction towards the support areas before a re-energized rally resumes with a main trend,” he added.
Dixit said a “Three Black Crows’ formation on December gold futures’ daily chart indicated further correction.
“Going into next week, a sustained move above $1,747 (the 50-week EMA on 4 Hours chart) can take gold to between $1,758 and $1,763,” he said. “Further trades above $1,763 can attempt a retest of the previous day's high of $1,768, above which gold can resume its advance towards $1,780-$1,796-$1,803.”
But he also cautioned that a break below $1,746 could push gold down towards $1,735-$1,721 support, with the likelihood of a decline deepening to $1,712-$1,701 and $1,697.
“As the mid-term trend is bullish, buyers are likely to resurface and join the resumption of the bullish trend that targets $1,830-$1,850-$1,875 over an extended period of time,” Dixit added.
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.