By Barani Krishnan
Investing.com - One week ago, we were talking about an Iranian attack on oil tankers. This week’s conversation was dominated by Iran’s downing of a U.S. drone and how President Donald Trump almost retaliated, before standing down in the final minutes. It wouldn’t be too surprising if next week brings another provocative Iran attack of some kind to push the president's button again.
As Olivier Jakob, founder of Swiss energy consultancy PetroMatrix, commented wryly on Friday: “In view of the 2020 elections, President Trump is facing a formidable challenge to address the military provocations of Iran, while avoiding a spike in gasoline prices and a correction of the stock market.”
Trump spoke of “major additional sanctions” against Iran on Saturday, before being holed up at Camp David, to plan his next move against the Islamic Republic. Last week’s 9% jump in U.S. West Texas Intermediate crude was its biggest since Nov. 2016. Brent's 5% weekly gain was the most since the week ended Feb. 15.
On the precious metals front, bullion and futures of gold breached the magical $1,400 mark, hitting near six-year highs. With $1,500 being touted as the next target of gold bugs, some wonder if the yellow metal is better positioned than oil to benefit from the war cries in the Middle East -- as well as the Federal Reserve’s widely-expected rate cut.
Energy Review
There was no weekend short-covering for Iranian risk in the previous week despite the attack on the oil tankers. After this week though, we can't be sure that risk traders can ignore Iran anymore.
The FAA has ordered U.S. airlines to stay clear of the skies of Iran and it is likely that others will follow suit. Military escalation is a weekend risk.
As Jakob of PetroMatrix noted, the U.S. president first called out Iran on making a "very big mistake” on the drone strike, before pinning blame on an Iranian general "who was loose and stupid”. "Trump clearly does not want to engage in a Middle-East war, but it will be harder and harder for the White House to leave the momentum to Iran without any U.S. response."
Price wise, Brent's backwardation has eased further and WTI is almost out of contango despite high Cushing stocks. Gasoline has also seen strong support after a fire at the PES Philadelphia refinery.
Crude’s rally could extend into the coming week if the U.S. Energy Information Administration issues another strong dataset on crude stockpiles and gasoline demand like in the just-ended week.
Next week will be the final stretch before the July 1-2 meetings of OPEC and its key non-members’ alliance led by Russia. Typically, it is a time when OPEC ministers are most energetic in talking up oil prices. And the debate before them on extending production cuts by another six months will be rich for rhetoric.
Adding to that will be G20 in Osaka, where the star billing is Trump’s highly-anticipated meeting with Chinese leader Xi Jinping. Oil prices could also see another sharp upside if the U.S. president and his team hold, as he has promised, positive talks with China’s President Xi Jinping and negotiators from Beijing at the G20 meeting next weekend.
All these are hypothetical by the way, as a fall through in any could result in a fresh tumble in oil prices.
Energy Calendar Ahead
Tuesday, June 25
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, June 26
The EIA weekly report on oil stockpiles.
Thursday, June 27
EIA weekly natural gas report
Friday, June 28
Baker Hughes weekly rig count.
Precious Metals Review
Gold has been on an uptrend since the start of June, on speculation of a U.S. interest-rate cut. On Wednesday, the Federal Reserve opened the door for a possible rate cut in the future, sending the yield on the benchmark 10-year Treasury note below 2% — a key psychological level — for the first time since November 2016.
Investing.com's Fed Rate Monitor Tool sees a rate cut coming at the Fed's July 30-31 meeting.
Lower interest rates make safe-haven assets such as gold, which does not yield interest, more attractive while weighing on the U.S. dollar. In Friday’s session, the dollar index, measured against a basket of six currencies, hit a three-month low of 95.76.
“Should August gold climb and sustain above $1,420, my work will point to $1,445 to 1,450 as a minimum next target zone thereafter,” said Mike Paulenoff, gold commentator at MPTrader.com. “This will argue that its multi-year upside breakout will continue unabated, perhaps in reaction to the combination of an easier Fed, a weaker USD, rising inflationary expectations and heightened geopolitical tensions,” Paulenoff added.
Spot gold, reflective of trades in bullion, peaked on Friday at $1,411.72, its highest since Sept. 2013. For the week, spot gold was up 4.4% while for the month, it showed a gain of 9.7%.
Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, settled Friday’s trade up $3.20, or 0.2%, at $1,400.10 per ounce. It earlier peaked at $1,414.95, its highest since Oct. 2013, when it rose to nearly $1,454. For the week, August gold was up 4.5%. For the month, it showed a gain of 10%.
Some are now talking of $1,500 levels and beyond if conflict in the Middle East reaches new heights after Thursday’s drone downing by Iran, and signs that the Fed could cut rates by 50 basis points or so by next month itself.
“$1,500 looks like the next big round target,” said Philip Streible, senior market strategist for precious metals at RJO Fututres in Chicago. “Of course, there’s a lot of stop losses out there that need to happen first.”
Precious Metals Calendar Ahead
Monday, June 24
German Ifo Business Climate
Tuesday, June 25
CB Consumer Confidence (Jun)
New Home Sales (May)
House Price Index (May)
Fed Chair Powell Speaks
FOMC Member Bullard Speaks
FOMC Member Williams Speaks
Wednesday, June 26
U.S. Durable Goods Orders (May)
U.S. Trade Balance (May)
Thursday, June 27
U.S. Initial Jobless Claims
Pending Home Sales (May)
Friday, June 28
U.K. GDP
Eurozone CPI (Jun)
Core PCE Price Index (May)
Canada GDP
Michigan Consumer Sentiment (Jun)