Commodities Week Ahead: Inflation, Fed High Drama for Oil and Gold

With the most important Federal Reserve rate decision upon us after 15 months of hikes and new inflation data in the pipe just before that, oil and gold prices are set for a volatile week as market participants try to determine if the central bank will indeed pause its tightening and for how long.

On Wednesday, the Fed’s policy-making committee is expected to vote for a break from a rate hike campaign that started in March 2022. The Fed pivot is widely anticipated despite an economy still resilient and feeding inflation, contrary to persistent talk of recession.

Just ahead of the central bank’s decision will be the May reading for the Consumer Price Index on Tuesday.

The so-called CPI hit 40-year highs in June 2022, expanding at an annual rate of 9.1%. Since then, it has slowed, growing at just 4.9% per annum in April, for its slowest expansion since October 2021.

The Fed’s favorite price indicator, the Personal Consumption Expenditures, or PCE Index, meanwhile, grew by 4.4% in April. The CPI and PCE are, however, expanding at more than twice the Fed’s 2% per annum target for inflation.

Bloomberg provided just before the weekend a snapshot of analysts' thoughts to show divided markets — and the Fed itself — were on a stay in rates:

“Those who prefer to skip a hike in June want to wait and see — given the long and variable lags of monetary policy — how 500 basis points of rate hikes to date are cooling the economy. More hawkish members are convinced rates aren’t yet restrictive enough, and the Fed shouldn’t risk falling behind the curve. We see a ‘hawkish skip’ as a way to maintain unanimity on the committee.”

Gold Trades Lower Ahead of Fed

The front-month gold contract on New York’s Comex, as well as the spot price of gold, were both down ahead of Monday’s regular US session as traders tried to gauge the Fed’s mood for a rate pause and how long that might hold.

Rising interest rates had battered gold prices through 2022, as the Fed enacted its most aggressive pace of monetary tightening since the 2008 financial crisis. But the prospect of a pause in 2023 has kept gold upbeat so far this year.

Gold stands to benefit from any potential pause by the Fed and is expected to see increased safe-haven demand as global economic conditions worsen this year.

But the notion that US interest rates are likely to remain higher for longer, the upside in the yellow metal may be limited as returns on debt appear more attractive.

Oil Bulls Nervous

Oil bulls, meanwhile, seem to have a new problem — or rather, an old problem threatening to become new.

Crude prices fell ahead of Monday’s regular New York session, with US West Texas Intermediate sinking again below the $70-per-barrel support after Iran’s supreme leader said that the country was open to a deal with the West over its nuclear program, albeit with some caveats.

WTI is expected to bounce around in the $75 to $67 region.

Ayatollah Ali Khamenei said a deal was possible if Iran’s nuclear infrastructure was kept intact. His comments came just a few days after both Tehran and Washington denied reports that an interim nuclear deal was close. They reignited fears of a nuclear deal among oil traders, given that it could flood the market with supply as sanctions on Iranian crude exports are lifted.

Those long-on oil were dealt another setback last week by a drop in crude prices despite a “surprise” output cut of another million barrels per day announced by OPEC numero uno Saudi Arabia.

That surprise is in inverted commas because many market watchers had already appeared to know that Saudi Energy Minister Abdulaziz bin Salman would announce a unilateral output cut if the rest were not willing to put up one.

With its latest production maneuver, Saudi Arabia is effectively pledging to remove some 2.5M barrels per day from its production since October, versus a normal run of 11.5M barrels.

The Saudi move came after its 12 partners in OPEC, or the Organization of the Petroleum Exporting Countries, and 10 other allies, including Russia, in the OPEC+ alliance, decided to stay pat on production.

The cut Abdulziz tried to cutely label as a “Saudi lollipop” couldn’t sustain its sweetness beyond a couple of days. After a fleeting pop of nearly 3% on Sunday and another 1% rebound on Wednesday, crude prices had fallen most of last week.

The downside was distorted partly by Thursday’s false report from a Middle East news portal about a US-Iran nuclear deal that could legitimately channel some sanctioned oil from Tehran to the market.

“It’s been a volatile week for oil prices, starting with the spike on the back of Saudi Arabia’s one million barrel production cut and ending with the US and Iran denying a temporary nuclear deal that saw prices plunge on Thursday,” said Craig Erlam, analyst at online trading platform OANDA. “These are very jittery markets against the backdrop of a deteriorating economic outlook.”

Erlam also noted that the Saudi production cut had little impact on the eventual price of oil.

Reuters reported on Friday that the Saudis appeared to have caught those in OPEC+ unaware of their move. But almost all traders contacted by Investing.com seemed to have guessed the move, more because of Abdulaziz’s rabid obsession in trying to triumph against short-sellers in the market with his so-called production surprises that were losing their impact with each attempt of his.

The Saudi obsession with getting the market its way was reinforced by a Washington Post report on Friday that suggested that Crown Prince and king-in-waiting Mohammed bin Salman planned to hurt America in a big way if the Biden administration had retaliated against the kingdom’s deep oil production cuts that began eight months ago.

In what might give oil bulls a frisson of hope, the US Department of Energy, or DoE, announced on Friday it has committed to buy approximately 6 million barrels of crude oil thus far to replenish the Strategic Petroleum Reserve, or SPR, which has seen draws of about 200 million barrels over the past year and a half.

Despite the seemingly bullish element of the announcement, Anas Alhajji, a widely-followed energy market commentator on Twitter, said:

“Oil bulls must realize that if all stars line up for the Biden administration to refill the SPR with 180 million barrels, it needs about a year and a half. If you do not know this, time to wake up!”

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and m