Energy & Precious Metals - Weekly Review and Outlook

By Barani Krishnan

Investing.com - Moves in oil were as riveting as those on the Ukraine front this week. Given that Vladimir Putin has turned global energy prices into a referendum on his war, perhaps it shouldn’t be surprising. Yet it was. After nearly seven months into the invasion of Ukraine, the fortunes of both oil bulls and the Russian president's “special military operation” didn’t appear that special, after all.

​​Crude prices settled flat to slightly higher on Friday. But on a weekly basis, they fell for a third straight week, with U.S. crude’s West Texas Intermediate finishing again beneath the key $90 per barrel mark, while global benchmark Brent struggled vainly to recapture the $100 berth it lost on Aug. 31.

More interestingly was what was happening with the Russian president and his one-time stranglehold on energy prices.

There was a time when Putin’s mere hint of a squeeze in Russian energy exports would have made oil traders sit upright and sent crude prices flying.

Lately, however, some of Putin’s rhetoric seems to have lost its impact with the energy crowd. These included his threat to completely shut down all oil and gas flowing out of his country unless the G-7 halts its so-called “price cap” on Russian oil, and the EU dismantles sanctions built around the Nord Stream 2 pipeline.

Let’s be clear about something: the energy market, in general, is still super tight on supply. One major disruption is all it might take for prices to come screaming back.

Yet, oil prices haven’t really gotten too much higher from the seven-month lows they plumbed nearly two weeks ago. And that’s because of the overtime work the Federal Reserve has been doing in scaring the bejesus out of traders over inflation and interest rates. Oil bears have also had a helping hand from a lockdown-friendly China that seems Covid time-trapped in Marty McFly's fictional DeLorean, when the rest of the world has moved on with the pandemic for more than a year now.

European gas prices are still sky-high, of course. And U.S. gas prices are aspiring for new 14-year highs each day in sympathy with what’s going on the other side of the Atlantic. This is in spite of a very-well informed constituency of the gas market patiently telling anyone who cares to listen that the US LNG output is capped at 13 billion cubic feet per day and there’s nothing more we can do about raising that right away — even if Europe goes to hell in a handbasket this winter, which, incidentally is what Putin wants (that it gets there in a frozen casket).

Anyway, much of the lofty projections for crude and gas prices in the fourth quarter of this year and the first quarter of 2023 are based on forecasts that the forthcoming winter will be brutal. No one knows for sure how that will turn out. If the opposite turns out to be true, I can only imagine how much money is going to be lost on the long side by those listening to the wonderful advice of Jeff Currie at Goldman Sachs.

But back to Putin. More interesting than the moves in oil was the public dressing-down the Russian leader got on Friday from one of his greatest allies — Indian Prime Minister Narendra Modi. And, unfortunately for Putin, that came after Russian forces lost important and embarrassing territory in Ukraine over the past week.

Crude prices closed sharply off their highs on Friday — WTI ended just a penny up — on news that Iraq’s Basra oil terminal had resumed pumping following a brief disruption over an oil spill. The dollar's resurgence on expectations of a third straight bumper rate hike by the Fed this week also put paid to Friday’s early rally in crude. A jump in the U.S. oil rig count to 736 was another negative.

While these events dominated Friday’s headlines on oil, inconspicuously weighing on the market, however, was the image of a Putin rendered somewhat smaller by his key ally Modi, after the Indian premier refused to share Russia’s passion for the war in Ukraine.

"I know that today's era is not an era of war, and I have spoken to you on the phone about this," the Indian leader told Putin as they chatted on the sidelines of the Shanghai Cooperation Organisation summit, which the Russian president has tried to use as a showcase of his alliance with China and India.

How Modi and China’s leader Xi Jinping respond to Putin and the war in Ukraine is important to crude prices, particularly from the perspective of the price cap on Russian oil that the Group of Seven countries want to impose from December to limit what Moscow can earn from its energy exports to fund the war against Ukraine.

For the record, India dismisses the G7 oil price cap, saying energy security needs - and economics - will guide crude purchases by its refiners. But within that reaction was India’s tacit admission that the lower the price of Russian crude, the more the demand from Indian refiners will be. And that basically underscores the aim of the oil price cap, which is to reduce Russian revenues from oil. Crude-importing nations, led by China and the United States, also get to see lower prices for a barrel in the futures market when discounted Russian oil lands on the physical market, pressuring competing barrels from Saudi Arabia and other producers. Russia can, of course, export more barrels at reduced prices to make up for lost revenue, but that’s not what Putin nor the Saudis want.

China’s Xi also refrained from embracing Putin exuberantly this week over the war in Ukraine. That forced the Russian leader to publicly acknowledge “the well-balanced position of our Chinese friends in connection with the Ukrainian crisis.”

In a further concession, Putin said on Friday Russia will uphold its energy commitments if the West lifts its restrictions against the Russian Nord Stream 2 gas pipeline that runs across the bloc. Just a couple of weeks ago, Putin virtually held oil and gas exports ransom in Russia’s dealings with the West.

“It’s a fact: Putin’s scare talk on energy is getting less scary these days,” said John Kilduff, partner at New York energy hedge fund Again Capital. “And Russia’s key allies, India and China, showed this week they are more like fair-weather friends than one that would stand with Putin in the eye of the storm.”

Oil: Market Settlements and Activity

New York-traded West Texas Intermediate did a final trade of $85.40 per barrel after settling the official session just a cent higher at $85.11.

For the week, the U.S. crude benchmark was down almost 2%, adding to the near 7% loss over two prior weeks.

London-traded Brent did a final trade of $91.57, after settling the official session up 51 cents, or 0.6%, at $91.35 per barrel.

For the week, the global benchmark for oil fell 1.6%, adding to the near 9% slump over the two previous weeks.

Oil: Price Outlook

Technically is caught between a rock and a hard place, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“The price action setup is absolutely weak,” said Dixit. “As long as WTI sustains below $88.50, bears will continue to push for $82.50 and $81.20. If this zone fails as support, look for the 78.6% Fibonacci level of $77.”

He noted that through the last two weeks, the U.S. crude benchmark had failed to make a sustained break above $88.43 (61.8% Fibonacci retracement of $62.43 - $130.50) despite testing $90.37 and $90.17.

“Previous week's drop to $81.20 caused some bounce as prices approached the monthly middle Bollinger Band at $82.47, however, lack of buyers' confidence kept prices subdued,” Dixit said in his analysis. “Weekly stochastics at 9/8 continue to crawl below the 20-mark for the 7th straight week, while weekly RSI languishes in oversold territories.”

On the flip side, a sustained break above $88.50 can resume recovery towards the 50 Week Exponential Average of $92.08 and challenge the $96.50 (50% Fibonacci level) and $97.10, which represents the 200-Day Simple Moving Average.

Gold: Market Settlements and Activity

It’s amazing how much 24 hours could do to gold in the just-ended week, versus what 24 previous months did.

On Thursday, when neither the forex nor bond markets did enough to move the needle on gold prices, bears found it fit to hammer the yellow metal to the mid-$1,600 lows seen before the pandemic rally of 2020 that eventually resulted in all-time highs of above $2,100 for bullion.

In an ideal world, market moves sync perfectly with the news, data and other valuation matrix of an asset. In the real world, of course, there’s a greater chance for things to be overly exuberant or gloomy.

Thursday’s selloff in gold was beyond gloom. As a wave of risk-off sentiment built across commodities, longs in the yellow metal ostensibly became its biggest victims. One by one, the stop losses in gold got taken out like ninepins, as the market teetered on unfounded panic.

For what it’s worth, the benchmark gold futures contract on New York’s Comex, December, did a final trade of $1,684.50 after settling the official session up $6.20, or 0.4%, at $1,683.50. For the week, it fell 2.6% for its fourth week in the red out of five.

The spot price of bullion, which is more closely followed than futures by some traders, settled up $10.90, or 0.7%, at $1,675.42. For the week, spot gold lost 2.4%, also settling down for a fourth week in five.

And with another 72 hours to go before the Fed’s September decision on interest rates, there’s room for things to get a little more uncomfortable for gold bulls before they get better.

Gold: Price Outlook

Dixit of SKCharting said gold’s drop below $1,681 over the past week has shaken the confidence of market bulls as the plunge corresponds to a 38.2% Fibonacci retracement of long-term rally in bullion that went from $1,046 to $2,073.

“With this phenomenal drop that pushed the metal below the 200-week Simple Moving Average of $1,676 and the 50-month Exponential Moving Average of $1,670, there is a growing possibility of gold dropping further down to the next leg lower. We’re talking about the 50% Fibonacci level of $1560 over the Fed's rate hike spree that can add to the Dollar Index strength and Treasury yields.”

But, as per “old school”, gold is also likely to retrace upward towards the broken support-turned-resistance zone of $1,700-$1,710 before resuming the drop towards $1,560.

“Long story short, the metal has become extremely undervalued over the last six months as it accumulated a massive $420 loss,” Dixit noted.

While the weekly and monthly stochastics of 9/14 and 5/11 have reached oversold territories, daily stochastics have already made a positive overlap.

“Going into the week ahead, recovery may target $1,695 and $1,705 initially.

Buyers may step in around $1,670-$1,665. A 75-bps Fed hike is not only baked into the cake; it’s already digested. If there’s a 100-bps for any reason, gold will melt faster than ice under 100 Fahrenheit. We could go to $1,618 in a blink.”

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