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Energy & precious metals - weekly review and outlook

Commodities Jan 29, 2023 07:04
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By Barani Krishnan -- With little fanfare, delegates to the 23-nation coalition of oil producers called OPEC+ will plug their laptops next week into a Zoom meeting they hold at least once every two months. 

The proceedings typically yield in ayes all around to whatever’s planned by the Saudis and Russians who run the group. The Feb. 1 meeting is also expected to end uneventfully, with a decision to likely roll over production targets agreed in December.

Ask any OPEC+ delegate what the oil-producing alliance wishes to achieve and you’ll likely hear the word “balance” come up more than once. 

There are actually three published goals for the 13-member Saudi-led OPEC, or Organization of the Petroleum Exporting Countries, which embraced Russia and nine other oil producers in 2015 to form OPEC+.

The three are to coordinate and unify the oil policies of the different producing countries to achieve “fair and stable prices”; maintain “efficient, economic and regular supply” to consuming countries; and work toward getting investors in the industry a fair return on capital. 

But in media interviews, OPEC spokespeople often mash those three ideals into one choice pursuit called “balance”. To them, the market is considered “balanced” when crude is trading at $100 a barrel or more, or at least above $90 (on Friday, U.S. crude settled at under $80 while Brent stalled at below $87). If oil gets to $200 someday, we can presume that it will be even “more balanced” in OPEC’s eyes.

This is because, in the six decades of OPEC’s existence, oil producers have been razor-focused on one thing and one thing only: Higher prices. In practice, economic supply for consumers - one of the stated goals of OPEC - isn’t possible because what’s economical to consumers simply isn’t to producers. 

From OPEC’s viewpoint, consumers want the lowest price that would bankrupt oil companies and freeze investments in future production (those who argue against this should think of the minus $40 a barrel that U.S. crude got to, during the height of the pandemic). On the flip side, oil companies are now declaring record profits. But they’re still not investing in production, citing unfriendly government policies instead.

So, here we are, stuck over the definition of what balanced prices for crude should be.

With the just-ended week being a disappointing one for oil bulls wishing to put the market into a higher trajectory after a dismal start for the year, hopes will be rising again that OPEC+ can do something in the coming week to “balance” the market.

In reality, OPEC+ is struggling to balance the market - not from external pressure but from within. 

Since early December, the Saudis have been beset with a new headache - the G7 price cap on Russian oil - that has been producing all sorts of undesirable reactions in its closest ally Moscow. 

The price cap has put a $60 ceiling on each barrel of Russia’s Urals’ oil. That is a discount of at least $27 a barrel to the latest settlement in global benchmark Brent. In the real marketplace, the Russians are selling Urals even cheaper, up to $30 a barrel or more under Brent, especially to Indian buyers, say trade sources. 

And because they’re getting less money for their oil, the Russians are also shipping out more barrels these days than the Saudis wish them to. And those barrels are primarily going to two destinations - India and China, which are the only two nations the United States allows to buy sanctioned Russian oil without questions. The increased exports from Russia are not only messing up OPEC+’s aim of keeping production tight but also hurting the Saudis as India and China were also the largest markets in Asia for Riyadh’s state oil company Saudi Aramco (TADAWUL:2222). 

India bought an average of 1.2 million barrels of Russian Urals a day in December, which was 33 times more than a year earlier and 29% more than in November. Discounts for Urals at Russia's western ports for sale to India under some deals widened to $32-$35 per barrel when freight wasn’t included, according to a Reuters report from Dec. 14. 

The Indians even exported fuel produced from Russian crude to New York via a high-seas transfer at one point, despite U.S. sanctions prohibiting the import of Russian-origin energy products, including refined fuels, distillates, crude oil, coal, and gas.

Another Reuters report said China paid the deepest discounts in months for Russian ESPO crude oil in December, amid weak demand and poor refining margins. ESPO is a grade exported from the Russian Far East port of Kozmino and Chinese refiners are dominant clients for this. 

At least one ESPO cargo for early December arrival was sold to an independent Chinese refiner at a discount of $6 per barrel against the February Brent price on delivery-ex-ship (DES) basis, Reuters said, citing four traders with knowledge of the matter. That discount compared with a premium of about $1.80 fetched by an ESPO barrel in China three weeks prior to the deal. Brent’s plunge to a one-year low of just above $75 by Dec. 9 exacerbated the discount for Russian crude, though the U.K. crude’s rebound to $87 since has narrowed some of that difference.

If that wasn’t enough, yet another Reuters report from Friday said Russia’s oil loadings from its Baltic ports were set to rise by 50% in January from December levels. Russia loaded 4.7 million tonnes of Urals and KEBCO from Baltic ports in December. The January surge comes as sellers try to meet strong demand in Asia and benefit from rising global energy prices, said the report, which became the single biggest reason for Friday’s slump in crude prices that basically turned oil into a losing bet for January.

The Saudis, on their part, have slashed pricing on their own Arab Light crude to Asia to try and stay competitive amid the ruthless undercutting by the Russians — who are supposed to be their closest ally within OPEC+. 

Riyadh is also attempting to talk to Moscow, with Saudi Foreign Minister Faisal bin Farhan Al-Saud telling a Bloomberg interview recently that the kingdom was “engaging with Russia over keeping oil prices relatively stable”.

“We have a very important partnership with Russia on OPEC+ … that has delivered stability [to] the oil market … we are gonna engage with Russia on that,” Al-Saud said. 

But on the same day that the Saudi minister spoke, some 1,600 miles away in Ashgabat, the capital of Turkmenistan, Russia’s Deputy Prime Minister Alexander Novak was telling state news agency Tass that Moscow “is not discussing with OPEC+ possibility of its oil production cuts”.

Novak was responding to a question on whether the Kremlin will reduce oil output to demand a higher price for its Urals crude as the G7’s $60-per-barrel cap allows buyers to lowball the Russian product versus rival crude benchmarks such as the U.K. Brent, U.S. West Texas Intermediate, the Arab Light and Dubai Light.

"No, we are not discussing such issues," Novak said. 

It basically showed the two nations having different ideas on what they need to do at this point: The Russians need to sell as much oil as possible and at whatever price they can. The Saudis want to keep Arab Light competitive against Urals but not flood the market; hence their plan for a rollover in December production targets.

The G7 will have two more price caps coming into force on Feb. 5 on refined oil products out of Russia. No one knows what effect those will have on the Kremlin.

The powers-that-be in Riyadh are, however, aware that if workarounds aren’t found for these caps, they could be destructive to the fairytale-like harmony within OPEC+ that has masked the organization for what it really is — a bunch of states with contrasting finances and needs pressed into compliance by the Saudis and Russians on the mere promise of price stability. 

If that stability gets rocked for any reason, those within the alliance could see little reason for not returning to the days of old where each state looked out for itself - something the Russians are already making a marvelous example of.

Oil: Market Settlements and Activity 

New York-traded West Texas Intermediate, or WTI, crude for March did a final trade of $79.38 per barrel, after settling Friday’s trade down $1.33, or 1.6%, at $79.68. 

For the week, WTI fell 2.5% after a cumulative 11% rally in two previous weeks. Month-to-date, the U.S. crude benchmark fell 1%.

London-traded Brent crude for March delivery did a final trade of $86.33 after completing Friday’s session down 81 cents, or almost 1%, at $86.66. 

Brent fell 1.1% on the week after rallying almost 12% over two previous weeks. January-to-date, the global crude benchmark rose less than 1%.

Oil: Price Outlook

If WTI does not pop on the theater that OPEC+ pulls at its Feb. 1 meeting, then the U.S. crude benchmark could plummet to its recent low under $76 a barrel, technical chartist Sunil Kumar Dixit said.

“In case of a strong break below $79.10 and $78.60, the next drop for WTI would be $77.76 and this may be followed by even lower levels at $76.78 and $75.65,” said Dixit, who is chief technical strategist at

Despite multiple attempts to make a sustainable break above $82.60, Dixit noted that WTI settled the week in a relatively bearish mood at $79.68.

“Momentum appears trapped within a $4 range of $82.60-$78.60, which needs to break for further direction,” he added.

Dixit said a decisive breakout above $82.60 will open the way for WTI’s next leg higher to $83.88. That could be followed by $84.70. which is a 61.8% Fibonacci retracement from the drop of $93.76 to $70.06

Natural gas: Market Settlements and Activity 

The front-month March gas contract on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.856 per mmBtu, or million metric British thermal units on Friday. 

It settled the day at $2.849 - down 10% from a week ago but virtually unchanged from Thursday’s close.

Gas futures have lost 57% of their value over the past six weeks after an unusually warm start to the 2022/23 winter led to a collapse in demand for heating oil

Prior to this week’s plunge to $2 levels, gas hit 14-year highs of $10 per mmBtu in August, and even traded as high as $7 in December.

Natural gas: Price Outlook

Dixit noted that untiring selloff efforts continued in natural gas for a seventh week in a row, pushing prices down to $2.747 per mmBtu, with hardly any signs of exhaustion yet to the plunge. 

“The stochastics and RSI on the weekly chart have reached oversold conditions that call for a rebound either from current lows or a bit lower, at $2.60 and $2.35,” Dixit said.

On the flip side, oversold conditions call for a short-term rebound towards the resistance zone of $3.00 and $3.30, followed by peaks to the $3.50 and $3.70 supply zone, he added.

Gold: Market Settlements and Activity 

Gold for February delivery on New York’s Comex did a final trade of $1,928 on Friday after settling the session at $1929.40, down just 60 cents.

The spot price of gold, more closely followed than futures by some traders, settled at $1,928.15 - down 96 cents, or 1%, on the day. Spot gold peaked at $1,949.29 on Thursday before an intraday high of $1,935.40 on Friday.  

The $1,950 resistance is a key test for gold’s ability to scale towards record highs of above $2,000 an ounce, which it got to in April last year, almost reprising its all-time peak from August 2020. Since this year began, both futures and spot gold have gained more than 5% each.

Gold: Price Outlook 

Spot gold's failure to settle the week above $1,932, with its drop to below $1,928, raises the possibility of a further descent, said Dixit. 

“We could revisit gold's recent low of $1,916 and extend the decline towards $1,912, followed by $1,900,” he said.

If selling intensifies below $1,900, a further drop to $1,880 and $1,870 can be witnessed, Dixit said.

But if spot gold’s bullish trend stays intact, buyers were likely to resurface on the support zone in anticipation of an upshot targeting $1,965 and $1,972, he said.

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

Energy & precious metals - weekly review and outlook

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