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Energy & precious metals - weekly review and outlook

Commodities Nov 27, 2022 20:26
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By Barani Krishnan

Investing.com - When you hear it from Jim Cramer, you know enough people are talking about it. From oil-producing nations to day traders who are long crude, expectations are growing by the day for prices to rip back higher. Why? Because there’s a meeting of the OPEC+ coming. Because crude has lost almost 20% of its value in just three weeks - too much, some say. Because the West will soon have an embargo on Russian crude. Because Vladimir Putin is so mad with the G7 and EU for trying to put a cap on the selling price of Russian oil that he will definitely ban exports to any country participating in the plan.

These are all, of course, the arguments of oil bulls. To each of these, those short the market have their responses too. But before we get into debating any of them, let’s hear it from Cramer first. CNBC’s morning programming anchor and stock picker said charts were suggesting that the “mother of all buying opportunities” for oil is coming next month. Relying on the analysis of commodities strategist and futures-options broker Carley Garner, Cramer’s explanation as to why a reversal in crude prices is imminent includes the observation that Thanksgiving is usually the period when oil markets tend to bottom - ahead of the final OPEC meeting of the year that typically falls in late November or early December.

Right on cue, U.S. crude hit a 10-month low of $75.08 on Monday before Thanksgiving on Nov. 24. The Saudi-led 13-nation OPEC, or Organization of the Petroleum Exporting Countries, and their 10 allies steered by Russia, are to meet on Dec. 4. Cramer thinks investors will gear up to buy oil from next month, citing Garner’s opinion.

“She thinks there could be one last washout from this week, possibly early through December, and that washout could take crude down to the low $70s, or even the mid-$60s,” Cramer told his listeners on Tuesday, the day after New York-traded West Texas Intermediate, or WTI, crude, hit the mid-$70s, its lowest since January. “Once we get there [to the next low], she believes that could be the mother of all buying opportunities,” Cramer said.

Last year, after Thanksgiving on Nov. 25, WTI fell 12% the following day, touching a low of $67.40, and lost 21% for all of November 2021. Over the course of the next six months, crude rebounded with virtually no stop, gaining 73% in all to reach almost $115 by the beginning of May 2022.

“Throw in the fact that holiday weeks tend to have very light volume, that means any moves tend to get blown out of proportion because it doesn’t take [as] much to move a commodity - or a stock frankly - during these lighter periods,” Cramer said.

But some traders think oil may continue facing headwinds in the near term from China’s worsening coronavirus crisis, which is stirring memories of the country’s original devastation from the pandemic nearly three years ago.

A record number of new COVID-19 cases in No. 1 oil-importing nation China has made local authorities more determined to hold on to the country’s tough Zero-COVID policy, weighing on crude prices.

But a case review has also exposed a critical flaw in China’s Zero-COVID strategy: a vast population without natural immunity. After months with only occasional hot spots in the country, most of its 1.4 billion people have never been exposed to the virus, the Washington Post reported this week.

Chinese authorities, who on Thursday reported a record 31,656 infections, are scrambling to protect the most vulnerable populations, the report added.

According to Australia-New Zealand bank ANZ, the surge in new infections has already affected mobility and fuel demand in China, with implied oil demand seen lower by 1 million barrels daily than average, at 13 million barrels per day.

Crude prices also fell for a third straight week this week after European officials failed to agree on a price cap for Russian oil, despite debating a level thought to be more generous than a level that could risk retaliation from the Kremlin in the form of production or export cuts. Diplomats from the Group of Seven nations, or G7, have been discussing a Russian oil price cap between $65 and $70 a barrel with their European Union diplomatic counterparts over the past few days, but have been unable to reach an agreement, Reuters reported.

The aim of the G7 and EU is to limit the revenue from oil that could fund Moscow's military offensive in Ukraine without disrupting global oil markets, but the proposed level is broadly in line with what Asian buyers are already paying.

“So long as the suggested cap on Russian oil remains higher than what the market initially thought, the general impression is the Kremlin will react less adversely in terms of limiting its exports and production,” John Kilduff, founding partner at New York energy hedge fund Again Capital, told Investing.com. “That would be a negative for oil.”

High prices have also seemed to have started to weigh on diesel demand in the United States, where distillate inventories – comprising diesel and heating oil – have been slowly rising over the past few weeks, reports and data showed.

U.S. distillate inventories are still below the five-year average, but the gap in stocks compared to previous years has slowly started to narrow, suggesting that high prices are hitting demand, while encouraging more refinery output thanks to solid refining margins.

In this week’s inventory report covering the week ended Nov. 18, the U.S. Energy Information Administration said distillate stocks rose by 1.7 million barrels, with production rising to an average of 5.1 million barrels per day. Distillate fuel inventories are still about 13% below the five-year average for this time of year, but two months ago, they were more than 20% below the five-year average for that time of the year.

A flotilla of ships is carrying distillate fuel to New York Harbor to shore up stocks ahead of the winter, further easing supply worries, Reuters said in a report last week citing traders and shipping data. At least 11 vessels that can carry about 3.6 million barrels of distillate, which includes low-sulfur diesel and home heating oil, will arrive in New York Harbor in late November and early December, the report added. That would be equivalent to about 4% of all the U.S. East Coast's distillate fuel imports in 2021.

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?” OANDA analyst Craig Erlam asked in a recent oil market commentary.

Notwithstanding the double whammy of the tumbling Chinese demand for oil and the deadlock over the Russian oil price cap, those long crude expect a market rebound by next week in anticipation of remedial action by OPEC+ when it meets Dec. 4.

OPEC+ already has in place an agreement to cut production by 2 million barrels per day till the end of next year to boost Brent and U.S. crude prices, which have fallen some 40% from their March highs.

Earlier this week, Saudi Energy Minister Abdulaziz bin Salman indicated that OPEC+ will likely add to those cuts when it meets Dec. 4.

Oil: Market Settlements and Activity

Crude prices fell for a third straight week after European officials could not agree on a price cap for Russian oil despite debating a level deemed more generous than the market thought to trigger export or production reprisals from the Kremlin.

A record number of new coronavirus cases in No. 1 oil importer China that hardened the resolve of local authorities to hold on to the country’s tough Zero-COVID policy also weighed on crude prices.

Adding to the market’s somber mood were thinner-than-usual trading volumes after Thursday’s U.S. Thanksgiving holiday, an event that typically prompts traders to take longer breaks till the weekend.

New York-traded West Texas Intermediate, or WTI, did a final trade of $76.55 per barrel on Friday after settling the official session at $76.28, down $1.66, or 2.1%, on the day. The U.S. crude benchmark, which hit a 10-month low beneath $76 on Monday, was down 4.5% for the week, after back-to-back losses of 10% and 4% in weeks prior.

London-traded Brent did a final trade of $83.91 per barrel on Friday after settling the official session at $83.63, down $1.71, or 2%, on the day. The global crude benchmark slumped to a nine-month low of under $83 on Monday, and was down 4.5% for the week, after back-to-back losses of 9% and 3% in weeks prior.

Oil: WTI Price Outlook

While a further drop in U.S. crude prices can hardly be ruled out, the extent of any downside should be limited to the 200-month Simple Moving Average, or SMA, of $72.50 and the 50-month Exponential Moving Average, or EMA, of $71, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“These levels may defend WTI against sell off and provide uplift to broken support turned resistance zone,” Dixit said.

He said a closer look at WTI’s price action indicated a “great deal of possibility” for a short-term rebound from the support areas of $72 and $70.

If this upside were to extend, then WTI could target the 100-Week SMA of $81.50 and the 50-Day EMA of $85.50, followed by the 50-Week EMA of 89.50, Dixit added.

Gold: Market Settlements and Activity

Gold prices ended the week almost unchanged on continued bets for smaller U.S. rate hikes by the U.S. Federal Reserve offset worsening economic indicators.

U.S. gold futures’ benchmark December contract finished Friday’s trading down $8.40, or 0.5%, at $1,754 per ounce on New York’s Comex. For the week, December gold ended nearly flat after losing 0.9% the previous week.

The spot price of bullion, which is more closely followed than futures by some traders, settled at $1,754.68 an ounce, down 70 cents, or 0.04%, on the day. For the week, the spot price rose +0.3%.

But positive cues from the minutes of the Fed’s November meeting, released earlier this week, provided a tailwind for gold prices.

A majority of Fed policy-makers behind this month’s U.S. rate hike thought it was time to slow down the central bank’s aggressive pace of monetary tightening, minutes of that meeting released on Wednesday said.

“The minutes of the November 1-2 Fed policy meeting show that a substantial majority of participants thought a slowing in the pace of interest rate hikes would be appropriate soon,” the Fed’s policy-making Federal Open Market Committee, or FOMC, said.

The minutes were the clearest sign yet that the Fed was ready to take its foot off the rate hike pedal after carrying an intensive acceleration in rate hikes over the past seven months to cool inflation.

Inflation, as measured by the Consumer Price Index, expanded by 7.7% during the year to October, growing at its slowest pace in nine months after peaking with a 9.1% growth during the 12 months to June.

The drop came after relentless interest rate hikes by the Fed, which has added 375 basis points to rates since March, from a starting point of just 25. Despite such an aggressive campaign, inflation remains more than three times higher than levels preferred by the central bank, which has vowed to get to its 2% target.

Runaway inflation had prompted the Fed to add 375 basis points to rates since March. Prior to that, rates peaked at just 25 basis points, as the central bank slashed them to nearly zero after the global COVID-19 outbreak in 2020.

After four straight jumbo-sized hikes of 75 basis points between June and November, markets expect the Fed to impose a smaller increase of 50 basis points at its upcoming rate decision on December 14.

Gold: Price Outlook

Gold needs to make a sustained break above two walls of resistance - the monthly Middle Bollinger Band of $1,796 and the 100-Week SMA of $1,802 - in order to extend a rebound that targets $1,820-$1,830 and $1,842, said SKCharting’s Dixit.

“In the event of volatility-driven prices drop, then $1,722 and $1,710 would be important levels of support, failing which, the current bullish trajectory in gold would lose credibility,” Dixit said.

For the week ahead, gold was projected to test $1,750-$1,740 - or even $1,722 - followed by a renewed upside attack on $1,788 and $1,802.

“Strong accumulation and acceptance above $1,800 can open the gates to $1,842, which is a major resistance and target,” Dixit added.

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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