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Energy & Precious Metals – Weekly Review and Calendar Ahead

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By Barani Krishnan — One of the most insulting epithets hurled at investing professionals is where they are likened to blindfolded monkeys throwing darts at a newspaper’s financial pages to select portfolios almost as good as that picked by Wall Street’s best.

Friday’s market action was somewhat reminiscent of that.

Gold, the S&P 500, dollar and Treasury yields all fell simultaneously after Federal Reserve Chair Jay Powell’s affirmation of a potential stimulus taper by November or December, and his admission of continued uncertainty (for the 999th time, possibly) about the timeline for a rate hike. 

Bullion did rebound before Friday’s close, but the indiscriminate plunge in both risk assets and safe havens earlier in the day bears reflecting.

Extreme market uncertainty/negativity leads to extreme risk aversion. That’s a given, as Covid-19, the financial crisis and 9/11 would tell us. 

But this wasn’t one of those occasions.

Admittedly, markets had been on tenterhooks since the start of the year over the timing of the stimulus taper. 

But the cat has been out of the bag for over a month. 

Powell’s first signaling of a November announcement on the taper came after the Fed’s monthly policy meeting on Sept 22. 

The central bank’s minutes of that meeting, published on Oct 13, even proposed to cut some $15 billion each month from the stimulus till the monthly outlay of $120 billion was done in eight months. 

By reiterating on Friday that the Fed was on track to a taper, Powell was merely lending credence to what was almost a certainty.

But a rate hike is a different matter altogether.

The Fed’s inability to say with precision when the first Covid-era rate hike will come isn’t surprising.

The phenomenal breakdown in supply chains and uneven labor market in recent months has made the dynamics of the recovery more complicated than ever.

Inflation isn’t the only thing central bankers think about when raising rates. The pandemic, as we know, hit marginalized groups the worst. To the Fed, labor market statistics, including how different racial and other groups are faring, is just as important.

Smart money is often associated with Wall Street’s best. But there’s also such a thing as dumb money. 

The clueless state of investors on Friday to one of the most innocuous and repetitive remarks of the Fed chairman was mind-boggling.

To begin with, Powell wasn’t delivering Senate testimony or one of those news conferences he holds after each monthly meeting of the Fed, where he had just come off from brainstorming with other policy makers at the central bank. Friday’s event was a virtual appearance at a Bank of International Settlements conference on Africa. How it got magnified to the parallel of a Jackson Hole event was astonishing.

What’s certain is that the Fed cannot be certain about a rate hike until it achieves the matrix it has set on employment and supply-demand of materials. 

We can criticize the Fed’s lax attitude toward price pressures, especially its insistence that the current inflation is transient, and continue speculating on timelines of between June and December 2022 for a rate hike — based on ramblings of other Fed speakers and monthly updates of the so-called dot plot.

But the bottomline is Powell won’t pull the trigger until he’s certain that all or most conditions – including those that might secure his reappointment – are met. 

Uncertainty over the rate hike itself is no longer news. The smart money has to be smarter.

Gold Market & Price Roundup

Gold longs saw a second straight week of gains but not before a rollercoaster ride on Friday that took them to the euphoria of $1,800 levels, then a plunge and finally a positive close.

U.S. gold futures’ most active contract, December, settled at $1,796.30 per ounce on New York’s Comex, up $14.40, or 0.8%. Earlier in the session, December gold shot up to $1,815.50, only the second time in a week that it has gotten past the $1,800 level. 

For the week, the benchmark gold futures contract settled up 1.6%, extending the previous week’s gain of 0.6%.

Friday’s swings in gold were triggered by Fed Chair Powell, who during a virtual appearance at a Bank of International Settlements event, confirmed the central bank’s plans to start tapering its monthly stimulus of $120 billion between November and December, while holding out on giving a timeline for rate hikes.

Markets had been on tenterhooks for months on when the stimulus taper would begin. With that known, the speculation has moved on to rates. 

Gold wasn’t the only market tossed around in Friday’s session: the S&P 500 went from a record high to negative by midday.

It was also one of those odd days when the trifecta of gold, the dollar and bond yields fell, indicating that investors were basically clueless on what to do. 

“The key takeaway from Powell was that the Fed is on track to begin tapering and that should be done by mid-2022, transitory inflation might last a little longer than expected, and that rate hike expectations should be written in pencil,” said Ed Moya, analyst at online trading platform OANDA.

That gold still finished in the positive and up more than 1.5% on the week was still testimony of its inherent strength after weeks of being caught in the mid to lower $1,700 levels, said Moya.

“Wall Street knows that negative real yields will remain well into next year and that that gold will reassert itself as an inflation hedge,” he added.

Oil Market & Price Roundup

Oil bulls scored a ninth straight winning week as market attention again turned to the three-year lows in inventories at the U.S. storage hub for crude, even as natural gas and coal prices that supported a recent broad rally in energy turned lower on the week.

U.S. crude’s West Texas Intermediate benchmark settled up $1.26, or 1.5%, at $83.76 per barrel. WTI fell to as low as $80.81 on Thursday but on Friday it reached a peak of $83.86, just a dime below Thursday’s seven-year high of $83.96. For the week, it rose 1.8%, for a cumulative nine-week gain of 34%.

London-traded Brent crude, the global benchmark for oil, settled up 92 cents, or 1.1%, at $83.53. Brent hit a three-year high of $86.10 on Thursday. It rose almost 1% on the week for a seven-week gain of 15%.

Crude prices had their steepest drop in two weeks on Thursday after Russian President Vladimir Putin said the OPEC+ cartel which includes Moscow might put out more barrels than it has announced.

Oil prices were also down as China, India and other consumers fought back against high energy prices which they said could ruin their economies with runaway inflation. Adding to the pressure on energy markets were forecasts showing much of the United States will have a warmer-than-average winter.

Those factors had caused natural gas and coal prices to unwind from their highs of recent weeks.

Still, oil markets rebounded strongly on Friday as focus returned to plummeting inventories at the Cushing, Oklahoma storage hub for crude.

“The issue is that there is not going to be any opportunity to restock Cushing in the next 3-5 months as  runs  should stay high,” said Scott Shelton, energy futures broker at ICAP in Durham, North Carolina. “But it will be a volatile trade.”

In its weekly inventory update on Wednesday, the U.S. Energy Information Administration put the Cushing stocks at 31.2 million barrels, down from the previous week’s three-year low of 33.6 million.

On top of that, the EIA reported that crude stockpiles declined by 431,000 barrels in the week to Oct. 15, compared with analysts’ expectations for a build of 1.857 million barrels.

It was the first time in a month that the EIA had reported a weekly growth in crude stocks after the previous weeks of builds back-to-back that added about 13 million barrels to inventories.

Crude wasn’t the only component of the report to register declines. 

Gasoline inventories fell by 5.368 million barrels, the EIA said, compared with expectations for a draw of 1.267 million barrels.

Stockpiles of distillates, which include diesel and heating oil, slid by 3.913 million barrels in the week against expectations for a draw of 700,000 barrels, the inventory report showed.

Energy Markets Calendar Ahead

Monday, Oct 25

Cushing crude inventory estimates (private)

Tuesday, Oct 26

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Oct 27

EIA weekly report on crude stockpiles

EIA weekly report on gasoline stockpiles

EIA weekly report on distillates inventories 

Thursday, Oct 28

EIA weekly report on natural gas storage

Friday, Oct 29

Baker Hughes weekly survey on U.S. oil rigs

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

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