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Energy & precious metals – weekly review and outlook

Energy & precious metals - weekly review and outlook
© Reuters. — It’s here: The July oil bulls have been waiting for. The July the Saudi oil minister plans to make a difference with, via an additional million barrels per day in output cuts. The July where some of the most optimistic forecasters for crude think it could set highs of $90 or more for a barrel of .

Kicking off the bullish messaging of the Saudis and other oil producers will be the July 5-6 seminar of oil industry CEOs with energy ministers from OPEC – the Organization of the Petroleum Exporting Countries. OPEC and its allies, known as OPEC+, which include Saudi Arabia and Russia. The 23-nation alliance pumps more than 40% of the world’s oil supply.

Determined to control the narrative of this meeting, OPEC is again barring Bloomberg, Reuters and the Wall Street Journal from covering the event, similar to what it did at the last OPEC+ ministerial meeting in June.

“The focus will be on the OPEC seminar, which will likely contain an update on what the Saudis are thinking,” said Ed Moya, analyst at online trading platform OANDA.  “Saudi Aramco will also set prices for August, which will let us know how bad the demand situation has become or if they are going to get closer to competing with Russian prices.”

The bull thesis for oil in the second half is held up by expectations that major producer Saudi Arabia will cut production meaningfully to bring Brent to above $80 a barrel and U.S. to at least $75.

New York-traded WTI, ended the second quarter down almost 7% and the half-year 14% lower at $70.64 a barrel. London-traded Brent finished the quarter off by about 6% and the first-half almost 13% down at $74.90.

The Saudis, who lead OPEC+, have announced three production cuts since October that would theoretically remove 2.5 million barrels per day from their production, bringing their output to just around 9 million daily barrels in July. 

But crude prices have only rallied briefly after each of those announcements as rate hikes by the Fed and other central banks have become a bigger factor for the oil market which fears a worldwide economic slowdown that could impact energy demand. 

“The first half of the oil story shows disappointed oil bulls with concerns about rising interest rates, Federal Reserve officials promising a slowdown in the economy, bank failures, perceived weakness in Chinese oil demand and the inability to rein in sanctioned oil from Russia and Iran,” said Phil Flynn, energy analyst at the Price Futures Group in Chicago.

China will start releasing an estimated 10 million barrels of oil imported from Iran and Venezuela and waiting at ports for weeks amid increased cargo scrutiny, Reuters reported on Wednesday, citing trading sources with knowledge of the matter. 

Flynn, an ardent oil bull, however, thinks the second half could be a story “radically different” for crude and positive for those long the market as the current supply surplus “may turn into a deep deficit”.

A panel discussion on Wednesday hosted by the European Central Bank and including the heads of the Federal Reserve, Bank of England and Bank of Japan, showed nearly all on board with higher interest rates to curb higher-than-expected inflation.

Fed Chair Powell followed that up on Thursday by telling a banking event in Madrid that the U.S. central bank was trying to find the level for rates that will restrain economic activity and inflation without causing unnecessary weakness.

Also awaiting July has been the Fed, which is closely watching everything associated with the economy – from the labor market to energy-induced inflation, among others  – to decide on interest rates at its July 26 meeting.

Laying the path for the Fed are two disparate U.S. data points: First quarter and the , which could pull the central bank either way on whether to hike rates over the next 3-½ weeks or maintain the pause on monetary tightening that it decided on June 14.

U.S. GDP grew by an annualized 2% in the first quarter of this year, the Commerce Department said Thursday in a revelation likely to add to the Fed’s relief that its rate hikes of the past year had not weighed too much on growth.

Economists polled by US media had forecast a year-on-year growth of only 1.4% on the average for the January-March period. The Commerce Department’s prior growth estimate for the quarter was just 1.3%.

The Fed has been seeking a “soft landing” of the economy, something that translates to slower but not negative GDP growth. The latest quarterly result indicates that the central bank might just get its wish.

Offsetting some of the hawkish Fed mood was the latest PCE Index report released Friday. The PCE, an indicator closely followed by the Fed, grew 3.8% in the year to May — below the key 4% level for the first time in more than two years.

The Fed’s tolerance for inflation is a mere 2% per annum. The central bank has raised interest rates by 5% since the end of the coronavirus outbreak in March 2022, bringing them to a peak of 5.25% in an attempt to bring inflation back to its targeted level.

“[The] big picture [is] inflation is slowing, but it’s still too high for the Fed,” MarketWatch said in a commentary published soon after the PCE report was put out by the Commerce Department. “Senior Fed officials worry that rising labor costs and price increases in major parts of the economy such as housing could keep inflation at elevated levels for a few more years.”

Thus, expectations are that the Fed will boost lending rates by another quarter percentage point on July 26 that will bring them to a peak of 5.5%.

Oil: WTI Technical Outlook

If WTI is to gain strong upward momentum in the week ahead, it needs to move towards the 100-day SMA, or Simple Moving Average, of $73.90 that coincides with the weekly Middle Bollinger Band of the same value, said Sunil Kumar Dixit, chief technical strategist at 

“Sustainability above this zone will eventually extend the upward move towards the next leg higher, at the 200-day SMA, or Simple Moving Average, of $77.50 and the 50-week EMA, or Exponential Moving Average, of $78.80,” Dixit said.

On the flip side, a renewed attack on the 200-week SMA of $67.50 could extend WTI’s downside to $63.70, accelerating its correction into the major support territory held up by the 100-month SMA of $59.65.

Gold: Market Settlements and Activity 

Gold crossed the half-year mark with a gain of about 5% in both futures trading as well as the spot price of bullion. But the yellow metal’s hold on the $1,900 support is fraying amid fears of more rate hikes by the Federal Reserve.

on New York’s Comex did a final trade of $1,927.80 an ounce on Friday, after officially settling the session at $1,921 an ounce, up $11.50, or 0.6%, on the day. The intraday low of $1,908.15 was just above the three-month bottom of $1,900.60 struck on Thursday. For the week, the benchmark gold futures contract was up 0.4. For the month, it rose 2.7%, while for the year it showed a gain of 4.7%.

The , which reflects physical trades in bullion and is more closely followed than futures by some traders, settled at $1,919.62, up $11.34, or 0.5%.

Friday’s run-up in gold came as bulls in the space took heart in the mere 3.8% growth in the headline inflation reading of the PCE. Prior to this, the index was up by a revised 4.3% for the 12 months to April. 

But the , stripped of food and energy prices, continued to show an annualized growth of above 4%. For May, that component expanded by 4.6% – just below the forecast 4.7%, which was also the official growth rate for core PCE in April.

The Fed watches both headline and core PCE closely to gauge on how to proceed with interest rates.

Gold: Price Outlook 

Spot gold’s weekly price action is going deeper into correction territory, reaching $1,893 during the week despite Friday’s rebound that brought it back $1,900, noted SKCharting’s Dixit.

“The mid-term outlook remains bearish as the 5-week EMA is dynamically positioned at $1,938, making a potentially bearish crossover to the Weekly Middle Bollinger Band of $1,948, which may be seen as indication that bears have enough fuel for further downside exploration,” said Dixit.

The short-term range for spot gold is pegged at $1,938-$1,948 on the upper side and $1,888-$1,860 on the lower end.

In the week ahead, sustainability below the 5-week EMA of $1,938 will keep the bearish momentum intact with potential for a retest of the $1,893 low and the 50-week EMA of $1,888, Dixit said.

Resumption of the uptrend will require gold to clear through $1,948 first, and further resistance at $1,975, $1,958 and $1,968, he said.

“If bulls fail to clearly establish recovery above $1,948, bearish correction is very likely to extend deeper into the 200-day SMA of $1,860. Major support sits at the monthly Middle Bollinger Band of $1,835,” added Dixit.

Natural gas: Market Settlements and Activity 

Natural gas prices were down nearly 40% at the half-year mark. But with futures of the fuel posting their best monthly return in a year, traders are more optimistic about the second half as summer heat begins to stir more gas-driven cooling demand.

Most-active on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.774 per mmBtu, or million metric British thermal units, on Friday. It officially settled the session at $2.7980, up 9.7 cents, or 3.6%, on the day. 

For the week, gas futures were up 2.5%; for the month they rose 24% while for the quarter, they were up 26%. For the year though, they posted a loss of 37%.

It has been an interesting time for natural gas, with bulls managing to keep the market in the positive for most of June despite the mixed heat trends across the country. 

But it has also been a slow-burn rally due to temperature extremities in the South versus the benign conditions of the Northeast; and LNG maintenance versus reasonably stout gas production and renewables generation.

While summer weather hasn’t hit its typical baking point across the country, cooling demand is inching up by the day, particularly in Texas. This has sparked realization in the trade that higher price lows might be more common than new bottoms. The lowest Henry Hub’s front-month got to this week was $2.138, versus the $2.136 bottom seen at the start of June.

Indicators on air-conditioning demand, released Thursday by Refinitiv, the data arm of Reuters, showed there were around 65 CDDs, or cooling degree days, last week –  close to the 30-year normal of 70 CDDs for the period.

CDDs, used to estimate demand to cool homes and businesses, measure the number of degrees a day’s average temperature is above 65 degrees Fahrenheit.

has, meanwhile, seen smaller injections than forecast. Thursday’s update by the Energy Information Administration, or EIA, showed a build of 76 bcf, or billion cubic feet, for the latest week to June 23. Industry analysts tracked by had forecast a build of 83 bcf versus the previous storage level of 95 bcf for the week to June 16.

With the latest stock gain, total gas held in inventory across the United States stood at 2.239 tcf, or trillion cubic feet. That was 25.3% above the same week a year ago and about 14.6% above the five-year average.

Natural gas: Price Outlook

Continuation of its bullish momentum can take gas towards the 200-week SMA of $3.75 in the coming week, with the next immediate target being the 50-week EMA of $3.82, said SKCharting’s Dixit.

“The upward run in gas will remain on track so long as the price action respects the 5-week EMA of $2.60,” said Dixit. “Breaking below that zone can push prices down towards the Weekly Middle Bollinger Band $2.37”

The short-term range for gas is seen at $3.00-$3.25 on the upper side and $2.60 – $2.37 on the lower end.

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

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