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Energy & Precious Metals - Weekly Review and Outlook

Published 24/07/2022, 07:54 pm
© Reuters.

By Barani Krishnan

Investing.com -- Is a U.S. recession inevitable and what will it do to the price of oil?

Weekly jobless claims among Americans have hit five-month highs while sales of existing homes are down a fifth straight month amid a nine-month low in homebuilding. These are signs of trouble in the labor and housing markets — the other two principal drivers of inflation in America, besides oil.

On the energy front, U.S. crude oil prices have fallen three weeks in a row, losing 13% in that stretch. Brent Crude finished in the green last week but not before losing 17% over five straight weeks. At the pumps, U.S. gasoline was at $4.38 a gallon across the country as of July 23, down from last month’s peak of more than $5 a gallon.

To top it all, the Federal Reserve will likely impose a 75-basis point hike for July at its monthly rate decision on Wednesday. If so, it will be the second straight 75-bps hike that will take rates from a range of 0-0.25% in February to 2.25-2.50% by the end of this month. With three more rate decisions left for this year, Fed officials are indicating a high-end of 3.5% or even 4% for rates by the year-end. But money market traders are also pricing in rate cuts by 2023 with the implicit prediction the economic fallout from the Fed hikes will not be too great.

That the market is even contemplating a fresh easing by next year tells economists that the risk of a Fed-induced recession between now and then is reasonably high. The U.S. economy has already contracted 1.6% in the first quarter and a second quarter in the red is all that’s needed to technically call a recession.

US tax data at least suggests that aggregate labor income — reflecting gains in wages, hiring and incentive pay across the economy — has hit an inflection point, and that labor income is now shrinking in real terms, making a job market slowdown more likely.

Matt Trivisonno, who tracks tax withholdings for investors at DailyJobsUpdate.com, has been quoted as saying that he expects the 372,000 jobs gained in June “to be revised away in the future", with the possibility of "a nasty reversal" in monthly jobs data.

But again, if there’s a recession, what impact will it have on the energy sector itself?

As President Joe Biden announced from the White House on Friday, although gas prices have been falling for more than 30 days straight — since the start of summer, he said — the national average is still substantially higher than a year ago, when it was at $3.16 a gallon. Diesel prices are also averaging $5.46 a gallon as of July 22, just marginally down from last month’s $5.81.

The average gasoline price at around $4.40 a gallon is “still too high” and not “decreasing fast enough” despite the United States producing about 12 million barrels of oil per day — the most of any country, Biden lamented.

“We think it’s reasonable to expect more gas stations to lower their prices in response to lower input costs and thus, barring unforeseen market disruptions, to see average prices fall below $4 per gallon in more places in coming weeks,” Jared Bernstein, a member of the White House Council of Economic Advisers, said. He also pointed to actions the administration has taken to address the rising costs, such as releasing millions of barrels from the nation’s Strategic Petroleum Reserve.

Amos Hochstein, a State Department senior adviser for energy security, also said on CBS’s Face the Nation on Sunday that he was expecting average national gas prices to continue to decline closer to $4 a gallon.

There are several drivers for the drop in pump prices of gas, ranging from recession fears to a smaller-than-expected impact from Western sanctions on Russia; and improving supply relative to demand.

But analysts say it might be too early to rejoice over lower oil prices as the energy markets, natural gas included, were still highly volatile, and the downturn might not last. “It’s helpful that prices are coming down, but I wouldn’t run a victory lap yet,” said Abhi Rajendran, the director of research at Energy Intelligence.

Here’s a laundry list of what might determine the price of oil in the coming months:

  • Investor perception about the economy — The more chatter about recession and a further softening of consumer sentiment and consumer spending — the latest two jointly contributing to 70% of U.S. gross domestic product — might result in a self-fulfilling prophecy of a recession.
  • Fed rate hikes — It’s definitely not a case of “the more, the merrier” here. The contrary is true if consumer sentiment is to improve. Yet, reality calls for strong quantitative (tightening) medicine if the Fed wants to get inflation under control over the longer run.
  • Sanctions on Russia; more or less? — The impact on global oil flows from the sanctions has been less than the noise they have created. Moscow has so far been shielded by the West’s dilemma in continuing to buy from an undesirable source because the commodity itself is too essential for Europe’s needs. Notwithstanding a U.S. move to cap the price of Russian oil, countries like India and China stand ever-ready to buy discounted crude from Moscow.
  • In December, the EU will fully ban Russian maritime deliveries of crude oil, and in February, it will stop shipments of refined oil products from Russia. On paper at least, more European sanctions could further strain the already tight global oil supply in the coming months.
  • The Atlantic hurricane season — With each passing year, each of these storm seasons has gotten worse. While hurricanes come and go every year, any storm in 2022 could have a rippling impact on energy infrastructure, supply and prices due to the squeeze already on barrels from sanctions piled on Russia; the apparent inability of OPEC+ to produce what consuming countries want and US shale still below its pre-pandemic drilling glory.
  • The American lust for driving — Driving in the summer, or as long as the weather permits, is as great a lure for suburban Americans as grilling in the backyard. Rajendran, the director of research at Energy Intelligence, has been quoted saying that the price of gas, which is below $4 in some states, will likely return to $4.50 before Labor Day, then fall again, though not much below $4. Patrick De Haan, head of petroleum analysis at GasBuddy, agrees, suggesting that $3.75 could be the new normal for gasoline — not $2.75, which was the norm for at least four years until the rebound from the pandemic.

Oil: Market Settlements and Activity

New York-traded West Texas Intermediate, or WTI, crude did a final trade of $95.09 on Friday after settling the official session down $1.65, or 1.7%, at $94.70 per barrel.

For the week, the US crude benchmark fell almost 3%, extending to nearly 13% its loss over the past three accumulated weeks. Last week alone, WTI sank to $90.58 for its worst price since February.

London-traded Brent crude did a final trade of $103.61 after settling the official session down 66 cents, or 0.6%, at $103.20 a barrel.

For the week though, Brent finished up 2.2%, ending a five-day losing streak that had set it back by about 17%. The global crude benchmark hit a near five-month low of $95.42 last week.

Oil: WTI Technical Outlook

WTI looks likely to attract more selling in the coming week, says Sunil Kumar Dixit of skcharting.com, who points to weakened stochastic readings of 21/27 for daily, 13/24 for weekly and 48/63 for monthly in U.S. crude.

“Going into the week ahead, a sustained break above $101 can result in a short-term rebound towards previous week high $105 and extend to the weekly middle Bollinger Band of $107.50,” said Dixit.

But a sustained break below the 50-Week Exponential Moving Average of $92.88 will prompt a retest of the previous week’s near five-month low of $90.58, he cautioned.

“This will be an acceleration point towards the next leg down of $88 and the horizontal support areas of $85 and $83. If selling momentum gains strength, WTI can drop to the monthly middle Bollinger Band $78.50.”

Gold: Market Settlements and Activity

Benchmark gold futures for August delivery on New York’s Comex did a final trade of $1,725.30 after settling Friday’s official session up $14, or 0.8%, at $1,727.40 an ounce, after a plumbing near 16-month low of $1,680.96 on Thursday.

For the week, August gold rose 1.4%, after a previous five-week tumble that cost bulls a total of $172 or 9%.

The rebound came as the Dollar Index, which pits the greenback against six major currencies, slumped to a more than two-week low of 105.98 on Friday. The dollar, a contrarian trade to gold, hit two-decade highs of 109.14 on July 14.

The greenback has been in the red since, its decline accelerating after the European Central Bank joined many other central banks in raising interest rates as its focus turned towards fighting inflation rather than a potential economic downturn.

With an ounce remaining in the low $1,700 range, gold could be vulnerable to another dip into $1,600 territory next week.

But if Thursday-Friday trends are any indication, bullion could also bounce forcefully from any descent into the sub-$1,700 zone that could catapult it towards $1,800.

“Gold is starting to act like a safe-haven as weakening economic growth will force many central banks to abandon their aggressive tightening plans,” said Ed Moya, who heads U.S. research at online trading platform OANDA. “Gold might find resistance at the $1,750 level, but if it doesn't, not much will get in the way until the $1,800 level.”

Gold: Technical Outlook

Going forward to the next week, gold will need to break and sustain above the previous week's high of $1,745 to prompt a retest of the 5-week Exponential Moving Average of $1,756, said Dixit.

“The five-week long straight drop paused for a while as $,1680 attracted buyers, showing a technical bounce-back,” he said. “This is the horizontal support zone which has arrested major falls in the past on many occasions.”

He said oversold conditions for Comex’s August gold persisted in the weekly stochastic reading of 14/7, causing a bullish crossover and an upturn in the Relative Strength Index, which was at 36.

“If further strong buying and short covering from retail traders causes robust momentum, gold can extend recovery to $1,770-$1,780-$1,800-$1,815,” Dixit said.

The weekly chart suggests that the rebound can aim for $1,833, which will be a confluence zone for the 100-Week Simple Moving Average and the 50 Week Exponential Moving Average, he added.

Dixit, however, cautioned that gold wasn’t entirely out of the woods yet.

“A rejection from the $1,750-$1,760 areas will result in resumption of correction toward a retest of the $1,700-$1,680 levels and eventually the 50-Month EMA of $1,668, followed by the 200-week SMA of $1,655.”

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

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