Energy & precious metals - weekly review and outlook

Ahead of Friday‘s OPEC meeting, which oil bulls are counting on to intensify the group’s mantra on production cuts and crudes five-week rally, what the U.S. government reveals that inventories might be more telling.

Since the Saudis announced they will take an additional million barrels per day off their production this month - on top of other cuts by the broader OPEC+ group - crude draws reported on Wednesdays by the U.S. Energy Information Administration, or EIA, has been modest, to say the least.

While no one expects a barrel-for-barrel correlation between changes in Saudi exports and the U.S. crude balances, the weekly EIA reports should start showing sharper stockpile drops if the narrative of the super tight market for oil is to hold up.

According to regional data from Middle Eastern-based JODI, Saudi exports fell below 7 million barrels a day in May. If true, that would be a first in a long time for a country that for years rolled out between 9 million and 10 million barrels daily.

Due to its unparalleled disclosures and transparency, the EIA‘s numbers matter more for oil market optics at times than data released by any peer agency. With just a week’s data unreported for July, the EIAs numbers show the U.S. Crude inventories in a net build of 4.638M barrels over the past three weeks.

“I agree that just two or three weeks of data isn‘t indicative of much but I’d be very surprised if the EIA reports another anemic number for crude draws in the coming week or, worse, a build,” said John Kilduff, partner at New York energy hedge Again Capital.

“We have a near 15% rally in the flat price of oil for this month because the market has given the benefit of doubt to the production pledges made by OPEC,” adds Kilduff. “If the U.S. Supply situation somehow escapes the dire consequences of these OPEC actions, then we might have a replay of what we saw earlier this year with oil prices: Fast and furious on the way up, then down.”

Those who are long oil, however, say theres little chance of the market retreating easily this time. In May, for instance, when the U.S. crude tumbled from $80 per barrel the prior month to beneath $65. The Biden administration was adding about three million barrels to supply each week from the Strategic Petroleum Reserve. Releases from the emergency oil reserve stopped two weeks ago.

Notwithstanding the net U.S. crude build over the past three weeks, supplies are 7% below the five-year average, says Phil Flynn, an avowed oil bull and analyst with the Price Futures Group in Chicago. “Based on current demand levels, (supplies) are at their tightest levels in over a year,” he wrote earlier this week.

What‘s more, oil bulls argue, is that Wall Street miscalculated the resilience of the U.S. economy, with preliminary data showing a year-on-year growth of 2.4% in the second quarter versus forecasts for an expansion of just 1.8%. That growth number suggests the United States may dodge a recession altogether, they say. In fact, that’s what the Federal Reserve has also concluded, saying its economists have stopped pricing in a recession in their forecasts.

Flynn also says total petroleum product demand in the United States increased by 1.1 million barrels per day last week to a new peak of 32 million barrels a day. And continued declines in the U.S. oil rigs mean production will only decline, he adds.

Be that as it may, demand for both crude and fuels has been underwhelming this summer.

The EIA reported a gasoline inventory draw of just 0.786 million barrels last week, versus a forecast decline of 1.678 million barrels and the previous weeks drop of 1.066 million. Automotive fuel gasoline is the No. 1 U.S. fuel product.

Finished motor gasoline products delivered to the marketplace - an indication of demand at the pump - stood at 8.855 million barrels versus the prior weeks 8.756 million. Typically, at this time of year, more than 9.0 million barrels of gasoline or more are supplied to the market each week.

In the case of distillate stockpiles, the EIA reported a build of 0.245M barrels. Analysts had forecast a decline of 0.301M barrels last week against a previous drop of 0.014M. Distillates are refined into heating oil, diesel for trucks, buses, trains and ships, and fuel for jets.

And for all the decline in rigs, which are down to 529 this week from a January peak of 623, U.S. oil production itself has held up admirably at above 12M daily as shale companies continuously add to production efficiency. The EIA estimated an output decline of just 0.1M barrels last week - a routine adjustment that barely changes anything.

All things being equal, if the price of oil keeps going higher, it might create a new problem for the Fed, which has managed to bring inflation down 3% per annum from a four-decade high of 9% in June 2022.

If inflation spikes again, we know what the central bank will do: Pile on interest rates, which have already ballooned by 525 basis points from a mere 25 in March 2022. If another full point gets added to the U.S, rates from energy-related and other inflation that couldnt be too good for the economy - or the oil demand that rides on growth.

Oil: Market Settlements and Activity

New York West Texas Intermediate, or WTI, crude, along with London-based Brent oil both finished up for a fifth straight week, riding the rhetoric that supply was getting critically tight versus supply - although weekly petroleum data from the U.S. The government barely supported that notion.

But after a gain of as much as 14% for July alone, the rally is beginning to show some strain.

The market treaded water most of Friday before settling a touch higher towards the end. Earlier, longs in the game appeared undecided on whether to take profit and re-enter with new positions on Monday or hold on for another week till next Fridays OPEC meeting where more jawboning on oil prices was expected.

On Friday, WTI for delivery in September settled at $80.58, up 49 cents, or 0.6%. The U.S. Crude benchmark hit a new three-month high of $80.69 during the session, extending Thursdays peak. For the week, it rose 4.6% after a cumulative gain of 11.4% over four prior weeks. With just another session left for July, WTI was also up 14% for the month.

Brent for October delivery finished Fridays session at $84.99 - up 75 cents, or 0.9%, on the day. The global crude benchmark finished the week up 4.8%, adding to the prior four-week gain of 9.8%. For July, Brent showed a gain of more than 12%.

Oil: Price Outlook

WTIs flight to the top could continue if it gets past two resistance levels - $83 and $86 - said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“As week-long price action settles strong, bullish momentum continues with footprints advancing to reaching $80.70, well above the 50-week EMA, or Exponential Moving Average, of $78.50,” Dixit said.

“Next higher resistance is seen at $83.50 followed by 100-week SMA, or Simple Moving Average, of $85.30 and the Monthly Middle Bollinger Band of $86.40.”

On the flip side, support held at $79.40, with $79 being the psychological handle to crack.

“A break below this zone will be the first sign of momentum weakness, which may call for a short-term correction towards the 200-day SMA, or Simple Moving Average, of $76.50.”

Gold: Market Settlements and Activity

The spot price of gold settled the week flat, after three straight weeks of gains, while the new benchmark for U.S. gold futures was also unchanged on the week but closed just shy of $2,000 an ounce - setting an unusual price gap between the two.

Golds spot price, which reflects physical trades in bullion and is more closely followed than futures by some traders, settled at $1,959.20, up $13.58, or 0.7% on the day. For the week, it was flat.

On the futures side, most-active December gold - the new front-month on New Yorks Comex - settled at $1,999.90, up $14.70 on the day. For the week, it was barely changed, just like the spot price.

August gold - Comex‘s prior benchmark - tumbled 1.3% Thursday for its sharpest one-day loss since late June, responding to the Federal Reserve’s return to the path of monetary tightening. The U.S. central bank renewed its pledge to stay hawkish to bring inflation to its long-term target of 2%.

Also weighing on gold then was the European Central Bank‘s own quarter-point rate hike on Thursday and signal that it could pause by September - a potentially dovish development that nevertheless pushed the dollar higher versus the euro, adding to gold’s downside.

Gold: Price Outlook

SKCharting‘s Dixit said if spot gold fell further from Friday’s settlement of $1,959.20, the next line of support would be $1,951.

“Below that a retest of $1,942 looks likely, before deeper declines to the $1,930-$1,915 zone.”

On the flip side, consolidation above $1,951 will support a measured recovery towards $1,968 and $1,972.

“Resumption of an uptrend requires clearing through this resistance zone to set stage for a retest of $1,982 and $1,987,” added Dixit.

Natural gas: Market Settlements and Activity

Seven months into 2023 and the natural gas bull is still bound by mid-$2 pricing.

Weather forecasts indicating August temperatures may be lower than those of July put new restraints on gas longs who had been counting on this months superheat to extend into later summer, heightening power burns related to air-conditioning demand.

Also weighing on the near-to-term outlook for gas was stiffly higher production at above the daily threshold of one billion cubic feet, or bcf. This has been the bane of gas bulls who had relied on this months power burns and spike liquefied natural gas, or LNG, demand to push the market into $3 territory.

Production rebounded +1.2 bcf/d, which is unusually high compared to what has been previously observed for this time of week during the current maintenance season, Gelber & Associates, a Houston-based energy markets advisory, said in its daily report on natural gas this week.

“The other bearish factor at play is revisions of forecasts across the Lower 48 [states] that suggest the high summer demand weve seen may wind down earlier than previously thought.”

The September gas contract on the New York Mercantile Exchange‘s Henry Hub did a final trade of $2.643 per mmBtu, or million metric British thermal units, on Friday. It officially settled the session at $2.638, up 4.3 cents, or 1.6%, on the day. For the week, the September contract was down 2.5%, adding to the previous week’s 2% decline.

The weekly slide in gas came despite the U.S. Energy Information Administration, or EIA, reported that storage levels for natural gas rose by just 16 bcf last week versus forecasts for a 19-bcf build. The injection for the week ended July 21 compared with the 41-bcf build during the prior week to July 14. The 16-bcf increase also compared with the 18-bcf injection seen during the same week a year ago and a five-year (2018-2022) average increase of 31 bcf.

With the latest stock gain, total gas held in inventory across the United States stood at 2.987 tcf, or trillion cubic feet. That was 23.7 % above the same week a year ago and about 13.1% above the five-year average.

Natural gas: Price Outlook

Gas futures seem to be at an inflexion point of breaking out from mid-$2 levels though various resistance levels have to be crossed, said SKChartings Dixit.

Stability above the weekly Middle Bollinger Band of $2.39 is a significant affirmation, while acceptance above the 50-day EMA of $2.57 adds credence to bullish continuation, he said.

“Immediate upside resistance will be seen at the swing high of $2.84, after which the psychological handle of $3 comes,” Dixit added.

“Strong buying above this zone will eventually extend upward move towards the 100-month SMA of $3.25.”