Energy & precious metals - weekly review and outlook

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Investing.com - OPEC is counting on more crude buying from China in the second half of the year than it initially forecast, despite a slowing in the world’s number two economy. The cartel also thinks the greater risk to the oil trade is political wrangling over the U.S. debt ceiling crisis. Some analysts believe OPEC may have got its bets mixed up.

Data out of Beijing on Thursday showed 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 from earlier in the week was also disappointing, with a 1.4% decline in imports and an 8.5% drop in exports growth. It was testimony of an economy struggling to gallop despite various stimuli put into place since China abandoned all caution over COVID-19 early this year.

The sluggish China data was probably what prompted energy traders to shrug off OPEC’s latest monthly report which had a slight upgrade on Chinese oil demand. China is now expected to require 800,000 barrels daily, up from the 760,000 forecast last month, the 13-member Saudi-led OPEC, or Organization of the Petroleum Exporting Countries, said.

“Oil appears to have stabilized in the lower trading range it briefly entered into in March, between $70-$78 in Brent or roughly $64-$74 in WTI,” Craig Erlam, analyst at online trading platform OANDA, said, citing a “less inspiring Chinese Covid recovery” as one reason for the malaise.

Meanwhile, in the United States, employers added 253,000 jobs in April, way above economists’ expectations, while the jobless rate moved a notch lower to 3.4% from a previous 3.5%, according to Labor Department data that appeared to make it harder for the Federal Reserve to stop raising interest rates.

Economists polled by U.S. media had expected a jobs growth of just around 180,000 for April, from a previously published 263,000 for March which the Labor Department revised down to 165,000. Fed officials have said employment and wage growth have to cool significantly to effectively restrain the worst inflation the United States has experienced in four decades.

The labor market has been the juggernaut of U.S. economic recovery from the pandemic, with hundreds of thousands of jobs being added without fail since June 2020 to make up for the initial loss of 20 million jobs to the pandemic. Average monthly wages have also grown with barely a stop since May 2021. The Fed has identified robust job and wages growth as two of the key drivers of inflation.

Inflation, as measured by the Consumer Price Index, or 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 in two years. The Fed’s favorite price indicator, the Personal Consumption Expenditures, or PCE, Index, meanwhile, grew by just 4.2% in March.

Even so, those numbers were more than twice the Fed’s appetite for inflation, which stands at just 2% per annum. The central bank has raised rates 10 times since the end of the coronavirus pandemic in March 2022, adding a total of 5% to the previous 0.25%. Until the release of the overwhelmingly strong jobs data for April, there had been strong speculation that the Fed would stay at its June 14 decision on rates.

Many are still expecting a Fed pause next month. But some are not so sure.

“This [jobs number] is undoubtedly hawkish and puts the Fed in a real bind,” economist Adam Button said in a post on the ForexLive forum. “The Fed wants to pause and may soon even need to cut but the jobs market isn't cooperating. Now, jobs are certainly a lagging indicator but 3.4% unemployment is extraordinarily tight and this is the 13th straight month of non-farm payrolls beating the consensus estimate.”

Notwithstanding the jobs numbers, an advance reading for U.S. gross domestic product in the first quarter showed an anemic 1.1% growth on the year versus the 2.6% in the fourth quarter of 2022. A crisis of confidence among regional and mid-sized U.S. banks, which first broke out in March, has also resurfaced. Adding to those are concerns about a potential U.S. debt default, the first ever, if Republican lawmakers in Congress continue their political wrangling with the Biden administration instead of having the debt ceiling raised.

But each of these have their offsets. For several quarters now, U.S. GDP numbers have gotten better between the first and final reading. The Fed, in its most recent assessment of the banking system, said public confidence had been shaken but not shattered. And the political wrangling in Congress would likely be solved before the government runs out of money by June, as the Republicans probably don't want to be blamed for causing the catastrophe of the first-ever U.S. debt default.

Erlam of OANDA sums it up nicely: “You could throw U.S. debt ceiling drama and default into the mix but I'm only inclined to focus on remotely plausible events at this stage.”

So, is OPEC betting correctly? The next few months will tell.

Oil: Market Settlements and Activity

Crude prices settled down for a fourth straight week as disappointing Chinese economic numbers suggested that demand for oil might also slip in the world’s largest importer of the commodity.

New York-traded West Texas Intermediate, or WTI, crude showed a final post settlement trade of $70.09 a barrel, after officially settling Friday’s session at $70.04 per barrel, down 83 cents, or 1.2%, on the day. For the week, the U.S. crude benchmark showed a loss of 1.8%. Over the past four weeks combined, WTI was down 15%.

London-traded Brent crude officially settled Friday's session at $74.17, down 81 cents, or 1.1%, on the day. The global oil benchmark showed a drop of 1.5% on the week and almost 14% over the past four weeks.

Oil: Price Outlook

If WTI regains its upside mojo, it could move towards $75 in the coming week; otherwise, it could slide to below $70, possibly even threatening $60 support, Sunil Kumar Dixit, chief technical strategist at SKCharting.com said.

Dixit observed that the U.S. crude benchmark spent the week in a tight $4 range, moving between the $73.90 resistance and $69.90 support, and closed the week on a bearish note of just above $70 “within the previous week's bearish engulfing candle”. With the weekly Relative Strength Index at 42 and Stochastics at 32/45, the best bets were on a “continued downward momentum”, Dixit added.

“A sustained break below $70 will ease the way down towards the 200-week Simple Moving Average, or SMA, of $66.90. If WTI breaks and closes the day below the 200-week SMA of $66.90, the upcoming correction is likely to extend deeper into the 100-month SMA of $59.45.”

“On the flip side, consolidation above $70 will help some recovery towards $71.70 and $72.20, above which further upside towards the $73.80 resistance can be witnessed. If rebound continues above this zone, next upside targets will be $74.70 and $75.70.”

Natural gas: Market Settlements and Activity

On paper, natural gas looks good, closing up for a fourth week in five. For the bulls in the trade, though, that has barely moved the needle on prices stuck in the lower $2 range.

The front-month gas contract on the New York Mercantile Exchange’s Henry Hub showed a final post-settlement trade of $2.278 on Friday. It officially finished the session at $2.266 per million metric British thermal units. That was 3.5% up on the day and 6% higher from a week ago. The gains come after last week’s particularly sharp selloff of more than 11% that left the market up by a net 11% as well over the past five weeks.

Gas futures have been stuck at mid-$2 or lower since mid-March from benign weather that has created little need for either heating or cooling. Topping that has been robust production of the fuel, which has steadily added to the glut in gas supply.

As of last week, total gas stored in underground caverns in the United States stood at 2.141 trillion cubic feet, or tcf. That was 31.2% higher from the year-ago level of 1.632 tcf and 18.4% above the five-year average of 1.809 tcf. Notwithstanding the relative stability of $2 pricing, Henry Hub’s front-month is down more than 50% on the year since the end of last year.

Charts indicate little immediate change in the fortunes of gas bulls, said Dixit of SKCharting.com.

“A daily and weekly close above $2.40 will be initial signs of a resumption of the uptrend in Henry Hub’s front-month, to be affirmed by a clearing through of the swing high of $2.55,” Dixit said. Beyond that, sits the longer-term target of 100-day Simple Moving Average, he said, adding: “The flip side is that a steady dip beneath the 5-day Exponential Moving Average, or EMA of $2.19, will keep the downside momentum going. That could invite potential drops to $2.04 and $1.94.”

Natural gas: Price Outlook

Gas bulls need to take the market toward $2.40 per mmBtu and higher to have a clear shot at a rally, said Dixit.

“The target should be a day close above the 50-Day EMA dynamically positioned at $2.39, which will smoothen the path for a retest of the swing high $2.53, followed by the 100-day SMA of $2.74,” said Dixit. “Following that, the next major hurdle to cross would be $3.03.” On the flip side, he said, a sustained break below $2.03 will resume correction towards $1.94 and the major support at $1.74.

“The overall broader perspective in gas favors a resumption of the uptrend, targeting $3.03 over the mid-term, with some possibility of a limited consolidation,” added Dixit.

Gold: Market Settlements and Activity

Gold for June delivery on New York’s Comex settled at $2,019.80 an ounce, down 70 cents on the day, after a session low at $2,005.70. For the week, Comex gold was down 0.25%.

The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, settled at $2,010.88, down $4.21, or 0.2%. For the week, spot gold slid 0.3%.

Gold: Price Outlook

Dixit of SKCharting observed that gold did not show any major move throughout the week and closed within the previous week's range as price action remained capped within the $2,048 resistance and $2,001 support.

“As long as gold sustains above the 5-week Exponential Moving Average, or EMA, of $1,999, a retest of $2,016-$2,022 is very likely,” Dixit said. “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.”

The broader perspective in gold suggests traders should buy any significant dips as the return to record highs is looking increasingly likely, he adds.

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