Will money managers take meaningful profit from oil after five straight weeks of gains? And will gold bugs find a new lease of life with the Federal Reserve increasingly under
pressure from President Donald Trump to move rates from a pause to easing?
Imminent direction for two of the most closely-watched markets in commodities is far from certain.
Hedge funds long on oil will count on OPEC to tell another intimidating tale of tightening supply in its monthly report, slated for Wednesday, which could extend this year’s near-40% rally in U.S. West Texas Intermediate crude and 31% in U.K. Brent crude.
OPEC Report Keenly Awaited
Amid U.S. sanctions on Iranian and Venezuelan oil and prospects of armed conflict in Libya that could further strain output by one of OPEC’s key oil producers, what the Vienna-based cartel says could set the tone for new Brent highs above $70 per barrel. Libyan oil stockpiles likely fell by 830,000 barrels in the week to April 1, Orbital Insight, a Californian firm that tracks oil tank rooftops using satellites, reported to its clients this week.
The Paris-based International Energy Agency, which represents the West’s oil consumers, could also tell of a stronger demand versus supply story with its own monthly report on Thursday.
Specific oil themes aside, bulls will be hoping for Trump administration officials to continue leaking friendly soundbites on trade talks with China that could extend the market’s winning streak. The two economic giants are believed to be on the cusp on a trade deal that could end a year of tit-for-tat tariff strikes, although Trump himself was surprisingly restrained last week in predicting an outright win.
Possible Mixed Narrative On The Horizon
A mixed narrative could gain traction too in oil.
U.S. oil rigs rose by 15 last week, industry firm Baker Hughes reported on Friday, the first rebound of its kind in seven weeks, which suggests there could be more drilling by U.S. energy companies encouraged by WTI’s $21-per-barrel recovery in the first quarter after a peak loss of $27 in the previous quarter.
If rising rigs become a trend, they will almost certainly add to last week’s record high U.S. production of 12.2 million barrels per day, nullifying some of OPEC’s output cuts.
Dominick Chirichella, director of risk and trading at the Energy Management Institute in New York, spoke of the red flag from rigs in his weekend note as he laid out the themes that work for oil.
Chirichella remarked that U.S. crude production “continues in an overall uptrend, setting new production records on a weekly basis” even as “the global recession narrative seems to be moving to the background”.
Aside from rising rigs, U.S. crude stockpiles have also ballooned the past two weeks. While those have been blamed on issues at the Houston Ship Channel, more inventory builds could weigh on sentiment.
Technically too, oil is treading on overbought levels, with Brent breaching the 200-Day Moving Average of $69.57.
Crude In ‘Presidential Reaction Zone’
But more interestingly, oil at $70 per barrel has entered what can be regarded as the “Presidential Reaction Zone”. OPEC and oil bulls could be facing an increasingly agitated President Trump who wants crude prices, or more importantly pump prices of gasoline, to be affordable enough for his supporters as he kicks start his 2020 reelection bid. Having enjoyed a near 50% gain that dwarfs even the WTI rally, gasoline futures have to go down quite a bit to appease the president.
While Trump got no more than a few cents in concession on oil prices after his latest tweet that OPEC should raise production, he has other options to play.
One is to sign away another round of generous waivers to buyers of sanctioned Iranian oil when their export permits expire this May. Trump officials continue talking about “zero Iranian oil exports”, but few believe in that. Still OPEC will meet in June and could counter the president’s Iranian gambit with more cuts—unless, of course, he goes further by suggesting the U.S. is willing to hold talks with Tehran if the Islamic Republic wishes to avert further economic crisis from its nuclear program.
Trump vs Oil Bulls
The mere notion of a U.S.-Iran Nuclear Agreement 2.0 that would let Tehran export its crude again with freedom, albeit even with some restrictions, could drive the flat price of oil down by between $5 and $10 a barrel.
It’s unclear if the Iranians would want such talks with Trump—they have balked in the past—and Israel could protest too. Central to the U.S.'s Middle East policy has been its historic relationship with Saudi Arabia and Israel to balance Iran’s regional ambitions. Trump, for instance, has refused to support U.S. sanctions on Riyadh for the murder of the journalist Jamal Khashoggi.
Yet, Trump being Trump, he could propose talks with Iran just to plant the seed of fear into hedge funds that now appear bent on driving crude back to the highs seen before the crash of October 2018.
Gold Bugs Look For All Signs Of A Fed Easing
In gold, the rebound in U.S. nonfarm payrolls posted on Friday had gold bugs wondering whether the Fed will continue withholding interest rates for more of such encouraging growth or go on a dovish overdrive, launching a quantitative easing that Trump was pressuring the central bank to do.
Along with a raft of macroeconomic data due this week are the Fed’s minutes from its March policy meeting and a speech by the central bank’s vice-chair Richard Clarida.
Spot gold was little changed on the week, hovering just under $1,292 per ounce. Investing.com’s daily technical outlook has a “Strong Sell”, with strong support – Level 3 Fibonacci – at $1,275.80.