Commodities Week Ahead: Oil Vexed Despite 4 Weeks in Red; Gold Solid Above $2,000

What will the Federal Reserve officials and U.S. data say this week? Will there be redemption for oil longs? Or will crude be done in again by fears of slowing U.S. and Chinese economic growth — which could help gold build momentum instead towards a new record high?

After a big production cut announced at the start of April by the 23-nation Organization of the Petroleum Exporting Countries and allies — oil had only two solid weeks in the green, gaining about 9%.

From there, it has lost about 15%, roiled by a recurring U.S. banking crisis, recession signals, and the potential for the first-ever debt default by the United States if the Biden administration does not get its Republican rivals in Congress to agree to a higher debt limit by June.

Given the concerns over the U.S. situation, oil longs had actually banked on China to pick up the slack in oil demand. The OPEC+ alliance said in a report released Friday that China is expected to require 800,000 barrels daily, up from the 760,000 forecast last month.

But data out of Beijing last week showed that Chinese consumer inflation barely grew in April, while producer inflation sank to its weakest level since the peak of the pandemic in 2020.

Chinese trade data was also disappointing, with a 2.9% decline in imports and a 6.3% drop in exports growth. It was the testimony of an economy struggling to gallop despite various stimuli put into place since China abandoned all caution over COVID early this year.

John Kilduff, partner at New York energy hedge fund Again Capital, said,

“Despite OPEC’s optimism that China will buy more oil in the second half than originally anticipated, the crude market did not buy that bull.”

After four straight weeks in the red, crude prices were down again by midday trading in Asia on Monday, seeing scant support as recent data pointed to worsening economic conditions in the United States and China — the world’s two biggest oil consumers.

New York-traded West Texas Intermediate, or WTI, crude was at $69.84 a barrel by 02:45 ET (06:45 GMT), down 20 cents, or 0.3%, on the day. The session low was 69.42.

London-traded Brent crude was at $73.90 a barrel, down 27 cents, or 0.4% on the day. Brent earlier skidded to an intraday low of $73.50.

If WTI regains its upside mojo, it could move towards $75; otherwise, it could slide further, possibly even threatening $60 support, Sunil Kumar Dixit, chief technical strategist at SKCharting.com, said.

In the case of gold, futures for June delivery on New York’s Comex was at $2,020.40 an ounce, up 60 cents on the day, after a session peak at $2,023.60.

The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, was at $2,015.85, up $4.97, or 0.3%.

While gold ended the most recent week flat, Dixit said as long as gold sustains above the 5-week Exponential Moving Average, or EMA, of $1,999, a retest of $2,016-$2,022 was very likely.

“A sustained move above $2,022 will help gold regain some positivity, bringing $2,032-$2,038 on bulls’ radar. Also, reclaiming $2,048 and a strong acceptance above this zone will signal resumption of the uptrend, targeting a retest of the $2,081 record high.”

Focus across markets is now on a slew of Fed speakers this week, most notably Fed Chair Jerome Powell on Friday, for more insight into U.S. monetary policy. But signs of stubborn U.S. inflation saw markets rethink expectations that the Fed will cut interest rates this year, boosting the dollar and dented oil markets.

With investors worried that the Fed’s aggressive rate hikes could tip the economy into recession, appearances by several central bank officials in the coming days will be closely watched.

Fed Vice Chair for Supervision Michael Barr is to testify before Congress on recent banking sector stresses and the central bank’s response. On Friday, Fed Chair Jerome Powell and former Fed head Ben Bernanke will participate in a panel discussion on monetary policy in Washington.

Other Fed officials scheduled to make appearances during the week include New York Fed President John Williams, Cleveland Fed Governor Loretta Mester, Minneapolis Fed President Neel Kashkari and governors Philip Jefferson and Michelle Bowman.

Bowman said Friday that the Fed will probably need to raise rates again if inflation stays high.

The U.S. is also to release April data on retail sales and industrial production on Tuesday, with retail sales expected to rebound. The weekly report on initial jobless claims is due out on Thursday.

Talks between U.S. President Joe Biden and top lawmakers on raising the $31.4 trillion debt ceiling are due to resume early this week after a planned meeting on Friday was postponed to allow staff to continue negotiations.

The Congressional Budget Office warned Friday that the United States faces a "significant risk" of defaulting within the first two weeks of June if lawmakers fail to increase the debt the country is legally allowed to take on.

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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 market variables.