Energy & precious metals - weekly review and outlook

Investing.com - The much-awaited deal to raise the U.S. debt ceiling is in, President Joe Biden said on Saturday, potentially setting equity and commodity markets on a new wave of risk-taking - after weeks of fear about a government default on payments.

“Earlier this evening, Speaker McCarthy and I reached a budget agreement in principle,” Biden said in an announcement on Twitter, barely 24 hours after Treasury Secretary Janet Yellen said the administration had until June 5 to avoid default. 

Republican congressional leader Kevin McCarthy and Democrats led by Biden and Senate Majority Leader Charles Schumer have been in a stand-off for more than a month in raising the $31.4 trillion debt ceiling.  

Consequently, commodity markets had seen little risk-taking, with lower prices typically for economically-sensitive assets like oil and copper, and mixed action at the best for safe-haven gold. As precaution, Fitch Ratings said on Friday it had placed 11 U.S. credit-linked notes on a “Rating Watch Negative”, in the event a higher debt ceiling could not be agreed upon. 

Removing the threat of a default suggests that risk assets, including commodities, could move higher when markets reopen Tuesday after Memorial Day weekend. 

Yet, with latest inflation data suggesting the Federal Reserve may not be done with hiking rates at its June 14 meeting, any run-up will likely be intensive at first, before moderating or even easing over the next two weeks.

The Fed has raised rates 10 times since the end of the coronavirus pandemic in March 2022, adding a total of 500 basis points, or 5%, that has brought rates to a peak of 525 basis points, or 5.25%.

Fed Governor Chris Waller said earlier this week that the central bank may skip a rate increase in June but still lean towards a July hike depending on inflation data. St. Louis Fed President James Bullard, one of the more aggressive advocates for tighter monetary policy, has, meanwhile, suggested at least two more rate hikes this year, totaling 50 basis points, that would bring rates to a peak of 5.75%. 

The debt deal reached on Saturday itself was preliminary and required ratification by both sides, Biden said. “The agreement represents a compromise, which means not everyone gets what they want,”  the President said. 

“Over the next day, our negotiating teams will finalize legislative text and the agreement will go to the United States House and Senate,” he added, imploring the two sides “to pass the agreement right away”.

Oil: Market Settlements and Activity 

New York-traded West Texas Intermediate, or WTI, crude settled at $72.67, up 84 cents, or 1.2%. WTI slumped 3% in the previous session, but still managed to finish the week up 1.6%, extending the previous week’s rise of 2.2%.

London-traded Brent, the global benchmark for oil, settled at $77.12, up 86 cents. Brent finished the week up 1.8% after the prior week’s gain of 1.9%.

Oil rallied as much as 2% initially at Friday’s highs but gave back a chunk of those gains after the Fed’s favorite gauge for U.S. inflation came in hotter-than-forecast for April, indicating that the central bank will raise interest rates again in June and July versus expectations for a pause.

All key metrics in the so-called Personal Consumption Expenditures, or PCE, Index rose for last month against forecast levels as the Fed keenly looked for indicators that would compel a hold on its higher-for-longer monetary policy that has already seen 10 rate hikes over 15 months.

For the year to April, the PCE Index expanded at 4.4% versus forecasts for 3.9% and previous growth of 4.2%. For the month of April itself, it jumped 0.4%, as expected and versus a prior expansion of 0.1%.

“Core” PCE, which strips out volatile food and energy prices, gained 4.7% on an annualized basis versus both the projected and previous rate of 4.6%. On a monthly basis, it rose 0.4% against the forecast and prior rate of 0.3%.

“Inflation is a problem and the consumer remains red hot,” economist Adam Button said on the ForexLive forum. “The Fed is going to hike again and now the odds are 58-42% for June and July is 100% with a slight chance of another hike. At some point the Fed will have to pause and evaluate but we're lapping some very high energy numbers now and it's not enough to get inflation to a 3-handle. At minimum, the Fed needs to start seeing some monthly numbers at +0.3% or lower.”

In Friday’s session, oil traders attempted to recoup losses from the previous session as Russian Deputy Prime Minister Alexander Novak walked back his comments from Thursday that suggested that the OPEC+ alliance will not cut output again at its meeting on June 4.

OPEC+, an alliance of 13 nations in the Saudi-led Organization of the Petroleum Exporting Countries and 10 other oil producers steered by Russia, has had limited success over the past two months in trying to push crude prices up with production cuts.

In April, OPEC+ announced a 1.7 million-barrel-per-day cut, on top of a prior undertaking to shed 2M barrels daily. 

After the April cut was announced, crude prices only went up for two weeks, before turning lower over four weeks, erasing some 15%. The earlier reduction fared worse, resulting in just a few days of gains before prices tumbled to 15-month lows in March.

Novak, potentially sensing that another cut won’t do much for the group, said on Thursday he was still waiting “for an assessment of the situation in the market".

"But I don't think that there will be any new steps, because just a month ago certain decisions were made regarding the voluntary reduction of oil production by some countries due to the fact that we saw the slow pace of global economic recovery,"  he was quoted as saying by the Izvestia newspaper in a report reproduced by Reuters.

On Friday though, Novak suggested that Bloomberg had taken his comments out of context, though he did not dispute Reuters’ reporting.

“We do not agree with the fact that Bloomberg misrepresented information, based on an incomplete quotation, declaring Russia's disagreement with the possibility of making decisions at a future meeting,” the deputy premier said. “Russia will engage in discussions with partners to determine what is best for the market while adhering to all previous decisions.”

Oil: WTI Technical Outlook

Notwithstanding the outcome of the debt ceiling agreement deal between the White House and congressional Republicans, last week’s action in WTI indicates a pause in bullish momentum before the U.S. crude benchmark can charge higher, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“WTI should reach the weekly Middle Bollinger Band of $75.90 if it recaptures the momentum it left off earlier this week,” Dixit said. “Momentum accumulation from support areas is very likely to resume the uptrend, targeting a retest of $73.80 and a swing higher to $74.70, followed by $75.90.”

For any reason, if oil turns lower, expect a move back towards $70 support, with a view of testing $68, Dixit added.

Gold: Market Settlements and Activity 

Gold for June delivery on New York’s Comex did a final post-settlement trade of $1,946.10, after settling Friday’s session at $1,944.30 an ounce, up just 60 cents, or 0.03%, on the day. The benchmark gold futures contract fell to a nine-week low of $1,936.90 earlier in the day, after hitting an all-time high of $2,085.40 on May 4. For the week, June gold was off 2% after another 2% loss the prior week and 0.25% the week before that.

The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, settled at $1,945.74, up $4.89, or 0.3% on the day. Spot gold fell to a three-week low of $1,936.85 earlier in the session, after a record high of $2,073.29 earlier this month, according to Investing.com data. For the week, spot gold was down 1.7%, after another 1.7% loss the prior week and 0.3% the week before that.

Craig Erlam, analyst at online trading platform OANDA, said gold’s upside appeared cracked but not entirely broken.

Gold: Price Outlook 

While the provisional debt ceiling agreement announced by Biden could weigh on gold, the yellow metal might survive a larger selloff if the spot price sustains above the 50% Fibonacci level of $1,942 an ounce, said Dixit of SKCharting.

“We expect a rebound towards the horizontal resistance zone of $1,975, which if cleared, can extend the recovery towards $2,015.”

On the flip side, a sustained break below $1,942 followed by weakness beneath $1,936 will attract sellers, pushing the spot price down towards the 61.8% Fibonacci level of $1,910, Dixit said.

Natural gas: Market Settlements and Activity 

The front-month gas contract on the New York Mercantile Exchange’s Henry Hub did a final post-settlement trade of $2.418 per mmBtu, or million metric British thermal units after officially settling Friday’s session at $2.417 — down 5.9 cents, or 2.4% on the day. For the week, it fell 10.7%.

The benchmark gas contract hit an 11-week high of $2.707 on Monday, breaking out from the tight confines of mid-$2 pricing on the notion that the market may finally be turning the corner on fundamentals despite its oversupplied state.

By the end of the week though, it was back below the key psychological mark of $2.50, hitting a session low of $2.476.

Gas futures came off their highs despite the U.S. Energy Information Administration, or EIA, reporting an underwhelming storage build for a second week in a row that suggested the oversupplied market may be turning the corner on fundamentals.

U.S. natural gas storage rose by 96 billion cubic feet, or bcf, last week, the EIA said.

In the previous week to May 12, the EIA reported a 99-bcf build in natural gas inventories. 

Industry analysts tracked by Investing.com had forecast a 108 bcf build for both that week and the latest week to May 19.

With the latest stockpile increase, the EIA reported that total gas in underground caverns in the United States stood at 2.336 trillion cubic feet, or tcf -  up 29.3% from the year-ago level of 1.807 tcf and 17% higher than the five-year average of 1.996 tcf.

Notwithstanding the smaller-than-expected build, U.S. gas futures fell in Thursday’s session as traders responded instead to signs that Canadian gas supplies - disrupted over the past week by wildfires - have been normalizing as firefighters took control of the blazes in Alberta.

Natural gas: Price Outlook

Going further into the week ahead, gas futures could approach the major support zone of $2.01 per mmBtu, said Dixit of SKCharting.

“But consolidation against the current decline and momentum accumulation from support areas can resume the advance towards the recent high of $2.68, and extend the upward move towards $2.98 and $3.25,” added Dixit.

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