Energy & precious metals - weekly review and outlook

Pop the bubbly: Oil has rallied for nearly two months now and the run-up isn’t showing any signs of exhaustion, some say. But is that really the case? Let’s examine.

Helped by forecasts for record world oil demand this month - coming no less from the closely-followed International Energy Agency - crude prices finished up for a seventh straight week of gains. That’s the longest winning streak for oil bulls since June 2022.

“Energy traders remain overly confident the oil market will remain tight,” Ed Moya, analyst at online trading platform OANDA, said during Friday’s trade. “It doesn’t seem like exhaustion is settling in yet”.

Moya is, of course, right about how cheery the long oil crowd is on the prospects of crude, with the U.S. West Texas Intermediate, or WTI, hitting a 9-month high of $84.89 per barrel on Thursday. In just under two months, the U.S. oil benchmark has gained up about 20% in all.

But I’d argue with Moya about the endurance of the rally, especially the notion that it isn’t slowing. That’s because WTI rose less than 0.5% in the just-ended week. It was the smallest weekly advance for the U.S. crude benchmark since the run-up which began in the week to June 16. It compares with the near 5% rise from two weeks ago and the 5% also achieved in the second week of this rally.

And it’s not just WTI. London-based Brent crude also rose meagerly for the week. It settled at a little under $87 per barrel, up 0.5% on the day and 0.7% higher on the week.

Like WTI, the weekly gain for Brent was the smallest since the oil rally which began seven weeks ago. But in a similar trend to its U.S. counterpart, the global crude benchmark touched a new milestone on Thursday, reaching a seven-month high of $88.10. In under two months, Brent has gained 18%.

But Moya did acknowledge that after a seven-week run-up, complacency was setting into the oil market, enough “sometimes that … you get a decent pullback”.

And that complacency could become more evident from next week, if a couple of key resistance levels could be successfully triggered resulting in greater pressure for longs to take profit or shorts to wage a bear assault on what may be regarded as an overextended market.

“During the upcoming week, oil markets are likely to witness a test of the 100-week SMA, or Simple Moving Average, resistance of $85.60 or even a tad higher at the monthly Middle Bollinger Band of $86.90,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“This would be a challenging moment for bulls, as if they fail to defend these heights, bears will be interested in a better risk-reward math.”

Dixit noted that seven weeks of consistent bullish rebound takes a breather at $84.90 as prices approach horizontal resistance zone 100 Week SMA $85.60

In the event a correction from the higher resistance zone begins, a break below the daily Middle Bollinger Band of $80 will be the initial sign of momentum exhaustion, closely followed by a quick drop to the 50-week EMA, or Exponential Moving Average, of $78.80, said Dixit.

“If selling intensifies below this line, expect the short-term trend turning bearish with a further drop to the 50-day EMA of $76.90 and the 200-day SMA of $76.30.”

Gold: Market Activity and Settlements

Gold had its worst week in seven, hurt by an overall stronger dollar and elevated bond yields as investors digested the latest U.S. inflation numbers and awaited more economic data.

Most-active December gold on New York’s Comex did a final trade of 1,945.70 an ounce on Friday, after officially settling the session at $1,946.60 - down $3.20, or 0.1%. For the week, benchmark U.S. gold futures contract slid $29.50, or 1.5%.

The spot price of gold settled at $1,913.88, up $1.52, or 0.1%. For the week, it fell $27.74, or 1.4%.

"Investors have been coming in at these low-$1,900s levels and they've been buyers, but equally, when gold has strengthened, they've been sellers. That's helped to cap that range," said Philip Newman, managing director of Metals Focus.

"Investors are very focused on the expectation element of interest rates, as opposed to where they are actually, because of the Fed's consistent messaging that it's not about to lower rates and any rate drop has been pushed out into 2024," Newman added.

Data on Thursday showed U.S. consumer prices increased moderately in July, with the smallest annual increase in core inflation in nearly two years, lifting hopes that the Federal Reserve is at the end of its rate hike cycle.

However, San Francisco Fed Bank President and CEO Mary Daly said that more progress is needed before she would feel comfortable that the Fed has done enough to rein in inflation.

The U.S. dollar index and benchmark 10-year Treasury bond yields had their fourth consecutive weekly gain.

Interest rate increases tend to lift bond yields and also raise the opportunity cost of holding non-yielding bullion.

Gold: Price Outlook

Gold seemed at a crucial inflection point after days of moribund activity, notwithstanding the weekly drop approaching 2%, SKCharting’s Dixit said.

“Outright rejection from $1,947 high keeps pushing spot gold down towards the ascending 200-day SMA that’s dynamically positioned at $1,902, which if broken, can extend its decline towards the 50-week EMA of $1,896,” said Dixit.

Daily settlement below the 5-week EMA dynamically positioned at $1,919 keeps the short-term trend in spot gold bearish, Dixit added.

“It is going to be interesting to see the market reaction to the $1,902-$1,896 zone, which may significantly impact the further course of the price action for gold, which can either lead to a deeper correction into $1,850 or the resumption of the short term uptrend towards $1,950.”

“If this zone attracts buyers, clearing through the 5 Day EMA of $1,919 will be followed by immediate resistance at $1,929. Strong acceptance above this line will ease the path for the next leg higher at $1,941-$1,946.”

Natural gas: Market Settlements and Activity

The front-month September gas contract on the New York Mercantile Exchange’s Henry Hub last traded on Friday at $2.786 per mmBtu, or million metric British thermal units, after officially settling the session at $2.77, nearly flat from the previous session. For the week, the contract rose 7.5%.

It has been an interesting week for gas with the September contract making a run toward $3 pricing on speculation of production tightness before the near 7% rally was unwound within a day by a bearish storage report.

In Wednesday’s session, September gas settled up 6.6% as well, after reaching a near seven-month high of $3.018. Prior to that, the last time gas prices on the hub crossed $3 was during the week to Jan. 20, when they peaked at $3.595.

That rally was triggered by speculation that America’s favorite fuel for indoor cooling and heating might be facing a supply squeeze from pipeline issues.

Prior to Wednesday, the market had been stuck at mid-$2 for months as production often came in higher than thought, with weather conditions less intense than projected, resulting in less power burns than forecast for heating and cooling.

Analysts at Gelber & Associates, a Houston-based energy markets advisory, had warned earlier this week about maintenance issues on the NEXUS and REX pipelines that could slow gas production, which had often breached the daily threshold of 1 billion cubic feet, or bcf.

Nexus is an approximately 256-mile, 36-inch interstate natural gas transmission pipeline designed to transport up to 1.5 bcf of daily gas delivery from feed points in eastern Ohio to southeastern Michigan. REX, an acronym for the Rockies Express Pipeline, is a 1,679-mile (2,702 km) long gas delivery gas system from the Rocky Mountains of Colorado to eastern Ohio.

But any concerns of supply tightness were offset by the U.S. Energy Information Administration’s weekly report Thursday on natural gas inventories, which showed gas stockpiles rising 29 billion cubic feet, or bcf, during the week ended Aug. 4 — versus a forecast injection of 25 bcf and a prior weekly build of 14 bcf.

Total gas held in underground caverns across America was at 3.03 trillion cubic feet last week - up 21.4% from a year ago and 11.2% higher versus the five-year average.

“Large buying from short-covering is therefore likely finished for now and will no longer provide bullish support,” Gelber’s analysts added.

Natural gas: Price Outlook

Gas’s recent decline from the $3 psychological handle to $2.70 was a retest of the breakout zone, said Dixit, who sees potential for further advances toward the monthly 100 SMA of $3.247 and closely followed by the 200-day SMA of $3.29.

“Major resistance is seen at the descending 50-week EMA of $3.57,” he said.

“If gas drops further below $2.70, the next immediate support would be the 50-day EMA of $2.60, while major support remains intact at the 100-day SMA of $2.42, which aligns with the weekly Middle Bollinger Band,” Dixit added.

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