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Energy & Precious Metals – Weekly Review and Calendar Ahead

© Reuters.

By Barani Krishnan — After disappearing for about six months, new threats about global Covid spikes are back in the headlines. The question is, what will they do to crude prices this time? Or rather, what will OPEC+ do in response?

To most oil bulls, even discussing Covid’s impact on oil demand is a non-starter. To them, the pandemic is just an excuse made up by short-sellers to kill the oil rally, which they insist is in a multi-year structural bull market stemming from underinvestment and rampaging demand that cannot be easily fixed.

To put it in perspective, the number of people in the long-oil constituency who believe what’s reported in the media about the virus is probably about the same number among President Joe Biden’s rivals who believe that he won his election fairly. 

Every datapoint on infection spread, impact and mitigation is met with varying degrees of disbelief, scorn and rebuttal by this group, which is particularly annoyed with how media coverage of the virus had accelerated this week’s 6% loss in oil.

But OPEC+’s response to the matter will be entirely different. 

Notwithstanding, the 11% drop from the year’s price highs, the global oil producers alliance will feel vindicated somewhat by the new blowup in Covid caseloads because this is exactly what it has been cautioning about for months – or rather “the excuse” it has been using for not adding meaningfully to barrels in the market.

Despite being pressured since June by the United States and other consuming countries to free up more of the 5.0 million barrels per day of supply it was still withholding from the market as part of pandemic-era cuts, OPEC+ had refused to budge. 

It maintained that the market was adequately supplied – amid fears to the contrary that sent crude prices to seven year highs and inflation to red-hot levels in the top four consuming countries – the United States, China, India and Japan.

Those same four had hatched a plan in recent weeks, led by the U.S., to release some of their own crude reserves to get the market down, in defiance of the 23-nation OPEC+ that comprises the original 13-member Saudi-run OPEC bloc with 10 other oil producing countries steered by Russia.

The reserves release plan was reported earlier this week, cracking the $80 support for crude. But before the dust settled on that, headlines flashed from Europe that Austria had gone into a preemptive lockdown to contain a Covid blowup and that Germany was considering something similar. More European countries were also reported to be mulling stricter social restrictions amid an ongoing shutdown in Australia and cases ticking higher in the U.S. as well. Oil bears pounced on the news, forcing crude to $75 levels.

The world now awaits OPEC+’s reaction. The alliance meets in less than two weeks, on December 2nd. Already, expectations are running high that it will announce a series of counterstrikes to defend prices from collapsing further. 

In fact, even before this week’s bearish turn, the cartel had cautioned in its monthly report that it expected lower demand for crude in the fourth quarter. The Paris-based International Energy Agency, which looks out for oil consumers, had concurred with that outlook, adding that U.S. output of oil was likely to be higher as well in the coming quarters. Prescient or not, those early warnings have laid the ground for what OPEC+ is likely to announce in the coming weeks. 

The first action expected of the cartel is to put on ice the 400,000 barrels per day increase it had pledged since the start of the second half – an offer it had barely fulfilled anyway. Next, OPEC+ could deepen production cuts, depending on how serious the coming wave of the pandemic is. These initiatives could restore a decent portion of the near $10 that crude lost from its mid-October highs. 

But prices could also fall further before they rise, as observed by Jeffrey Halley, head of Asia-Pacific research at brokers OANDA, who reminded us recently of the oft-forgotten wisdom – that markets can stay irrational longer than investors can stay solvent. Since oil has opened a downward trend the past four weeks, that could continue. 

The oil ministers of OPEC+ know that too, with leading voices like Saudi Arabia’s Abdulaziz bin Salman and UAE’s Suhail al-Mazrouei expected to make some grim announcements before the Dec 2 meeting to try and position the market their way. 

Still, there’s nothing like the combination of soaring demand and tight production to send oil prices higher. And that demand looks questionable in the near term if more countries go into lockdown, as such a situation could slow a return to work and the recovery in aviation, which together account for gasoline, diesel and jet fuel demand.

Also, the threat by the so-called “consumers’ cartel” in oil, to use their reserves to fight back OPEC+, will likely remain, putting a cap on any rally. Few take the threat seriously. Even fewer believe the idea will have a material impact on prices, let alone that it will be carried out. Strangely, despite the pessimism and scorn poured over the plan, crude prices caved 4% on that alone this week, with the existential threat likely to matter in some way going forth.

For now, oil longs still have strong weekly drawdowns in U.S. crude stocks and gasoline stockpiles and distillate inventories to count on. These have helped sustain oil’s upward momentum for months now.

But the cold weather in the U.S. winter cycle also has to be prompt if the market is to benefit from energy-related heating to supplement the potential drop in transportation fuels if Covid breakouts become severe. 

“It looks like the music has stopped for now for oil bulls,” John Kilduff, founding partner at hedge fund Again Capital, said. “If the weather disappoints for any reason, expect $70 to be the peak, with lower $60s likely if Covid cases were to worsen.”

Oil Price Roundup

The front-month January contract in West Texas Intermediate, the U.S. crude benchmark, settled down $2.91, or 3.2%, at 75.94 per barrel. 

For the week, WTI fell 5.8%, bringing its combined losses over the past four weeks to 9.3%, after an 18% rally over nine straight weeks. Just in mid-October, the U.S. crude benchmark  traded at a seven-year high of $85.41. Despite the slump of the past week, WTI remains up 57% on the year.

In the case of London-traded Brent, its January contract settled down $2.35, or 2.9%, at $78.89 per barrel. 

For the week, the global oil benchmark fell 4%, bringing its combined losses over the past four weeks to 8%, after an 18% rally over seven weeks in a row. Just in mid-October, Brent traded at a seven-year high of $86.70. Despite the slump of the past week, it remains up 57% on the year.

Gold Market & Price Roundup

Gold posted its first weekly loss in three, but bullion’s defenders held defiantly at around the mid-$1,800 level as Friday’s trade dwindled to a close – despite a break below the key psychological level earlier.

Gold has settled only one day higher this week, with the other four days in the red being a sign that the rally that began in the penultimate week of October had reached exhaustion point.

Yet, with the long crowd fighting to keep the spot price of bullion, as well as the front-month of New York-traded COMEX futures, near the $1,850 level, there seemed chances the yellow metal could rebound next week.

“Gold is stuck in a broadening formation and that should remain the case given next week’s shortened trading week,” said Ed Moya, analyst at online trading platform OANDA.

“Inflation and Fed speak are the primary catalyst for gold and right now traders will need to see what happens over the next couple of weeks before having strong conviction on assessing what the Fed will do regarding interest rates,” added Moya.

U.S. gold futures’ most active contract, December, settled Friday’s trade down $9.80, or 0.5%, at $1,851.60 an ounce. It earlier hit a session low of $1,843.60 and was down almost 1% on the week.

Despite swings below $1,850 this week, December gold has also made a 5-week high of almost $1,880, shoring up the confidence of market bulls that the yellow metal could still get to $1,900 in the coming days and weeks on the back of the U.S. inflation theme.

Bullion has always been touted as an inflation hedge. But it wasn’t able to live up to that billing earlier this year as intense speculation that the Federal Reserve will be forced in a faster-than-expected rate hike had sent Treasury yields and the dollar rallying instead, at bullion’s expense.

That trend abated somewhat after Fed Chair Jay Powell assured earlier this month that the central bank will be patient with any rate hike that will only come after in the later half of next year. 

The Labor Department then reported last week that the U.S. Consumer Price Index, which represents a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% during the year to October. It was the fastest growth of the so-called CPI since November 1990, an acceleration driven mostly by pump prices of fuel running at seven-year highs. 

Since then, the U.S. 10-year Treasury note, a key indicator of real interest rates,  has hit three-week highs above 1.6% and the Dollar Index has reached a 16-month peak above 96. Ordinarily, that combination would have been fatal to gold. But the yellow metal has largely survived those threats this time.

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

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