By Barani Krishnan
Investing.com – “Sell in May and Go Away” is a proven stock market adage. But more than the S&P 500, it was oil that saw investors flee last month. West Texas Intermediate, the U.S. crude benchmark, lost a stunning 16%. Brent, the global gauge for oil, fell 11%.
And even after the worst losses in six months, the horror story may not be over yet for oil. The coming week, particularly, will determine whether WTI gets to stay above the critically-important $50 per barrel mark, and Brent the $60 threshold.
As of Friday, there was greater likelihood of the two breaking below those support levels than defending them. And there was good reason for that.
Just last week alone, all the positives in oil – from OPEC-engineered production cuts to sanctions on Venezuelan and Iranian exports that allowed WTI to build a rally as high as 40% year-to-date – seem to vanish suddenly. In their place were fears of a global recession, made very possible by a dramatic escalation in the U.S.-China trade war and unexpected tariffs on Mexico by President Donald Trump, who’s intent on punishing that country for apparently not doing enough to prevent illegal migration by its people into America.
Like oil, gold too is likely to have an eventful week. In the precious metal’s case, it will be whether it gets to build on the $1,300 psychological highs established last week, stay in a range around those levels, or fall back to $1,200 levels. For now, the path of least resistance in gold seems to be higher, with genuine fears about the economy driving the safe haven worth of bullion and Comex gold futures – a flip from recent weeks when the U.S. dollar was the preferred hedge to the trade war.
Energy Review
Two weeks ago, few in the oil trade would have imagined losing their shirts because of a cellphone company.
Last week, it was Mexican immigration that did them in.
Following through with his provocative attacks on Chinese mobile phone giant Huawei, Trump announced last week that he will slap a 5% tariff on all Mexican imports beginning June 10 and raise that progressively to 25% until the flow of undocumented immigrants across the border stops. While the president insists that the United States will benefit from its tough action against both China and Mexico, economists say U.S. consumers will lose both ways as importers will find ways to pass the import duties along to buyers. Hence, the fear of economic fallout that’s hammering oil now.
WTI broke below the $55 per barrel level the first time since February, setting a low of $54.73. Brent crashed under $65 to a 16-week bottom of $63.05.
On a more crucial technical level, both benchmarks broke below all key moving-day averages, from the 200-DMA right through to the 5-DMA. By dollar value alone, oil has lost about $11 on a barrel from a $22 gain accumulated since the Christmas Eve lows of last year, its bottom during the 2018 selloff. That's a loss of exactly 50%, coming despite continued production cuts by OPEC.
“'Screwed by Macro' may deserve a place on my headstone as prices are cratering due to 'trade fears'," ICAP (LON:NXGN) energy futures broker Scott Shelton lamented in a note on Friday after he called on investors just a day earlier to go long on oil in anticipation of strong crude draw numbers in the U.S. Energy Information Administration's weekly report released Thursday.
The EIA said in its regular weekly report that crude oil inventories decreased by just 0.28 million barrels in the week to May 24, compared to a forecast draw of 0.86 million barrels. In two previous weeks, it announced back-to-back builds of around 5.0 million barrels.
Oil bulls typically count on strong refinery runs and heavy gasoline consumption in the run-up the summer. But refiners have been slow to draw down crude in the run-up to this summer as profit margins for producing gasoline were running about 30% below year-ago levels.
Some suspect that one reason for Trump's escalation of trade battles around the world was to “rein in high oil prices after OPEC's refusal to raise production lately.
"Most interestingly, he hasn’t sent out a single tweet about oil for weeks now while carrying out all these, so you can’t even accuse him of intentionally suppressing the market," John Kilduff, founding partner at New York energy hedge fund Again Capital, said. "Oil bulls have no choice but to grit their teeth and see how far he goes.”
Energy Calendar Ahead
Tuesday, June 4
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, June 5
The EIA weekly report on oil stockpiles.
Thursday, June 6
EIA weekly natural gas report
Friday, June 7
Baker Hughes weekly rig count.
Precious Metals Review
What fears over China couldn't achieve, worries over Mexico did.
Bullion and futures of gold returned to the key bullish $1,300 mark on Friday as equity markets cratered and benchmarkU.S. Treasuryyields tumbled after President Trump's move to add Mexico to U.S. list of trade adversaries.
Spot gold, reflective of trades in bullion, traded at $1,304.81 per ounce by 2:35 PM ET (18:35 GMT), up $16.34, or 1.3%. It hit a seven-week high of $1,307.02 earlier. For the whole of May, spot gold was up 1.7%.
Gold futures for June delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $18.70, or 1.5%, at $1,305.80 per ounce. Comex's more active August gold, the forthcoming front-month contract, also closed up $18.70, or 1.4%, at $1,311.10.
In the coming week, investors will see if gold can break to $1,320 levels and above.
While gold has been the safe-haven of choice in times of political and economic troubles, where the U.S.-China trade is concerned, the yellow metal has faced much competition from the U.S. dollar. That had prevented gold from progressing, or even staying, in $1,300 territory previously.
That changed last week as recession fears spiked from Trump's latest trade battle with Mexico, a country it imports cars, televisions, clothing, alcohol and fuel from, for daily trades amounting to $1.7 billion. Now, economists are speculating that the Federal Reserve may be forced into a new round of economic easing after the four rate hikes it carried out last year. Money markets have priced in roughly two U.S. rate cuts by the start of next year as the yield curve between three-month bills and 10-year notes remained inverted.
Inflation has also been running below levels targeted by the Fed, placing its Chairman Jerome Powell again under the scrutiny of Trump, who's been pressuring for lower interest rates.
Precious Metals Calendar Ahead
Monday, June 3
China Caixin Manufacturing PMI (May)
U.K. Manufacturing PMI (May)
U.S. ISM Manufacturing PMI (May)
FOMC Member Bullard Speaks
Tuesday, June 4
Australia Retail Sales (April)
RBA Interest Rate Decision
Euro Zone CPI (May)
Fed Chair Powell Speaks
U.S. Factory Orders (Apr)
Wednesday, June 5
Australia GDP (Q1)
China Caixin Services PMI (May)
U.K. Services PMI (May)
U.S. ADP Nonfarm Payrolls (May)
U.S. ISM Non-manufacturing PMI (May)
FOMC Member Clarida Speaks
FOMC Member Bostic Speaks
Thursday, June 6
BOE Governor Carney Speaks
ECB Meeting and Press Conference
U.S. Initial Jobless Claims
FOMC Williams Speaks
Friday, June 7
China Market Holiday
Canada Employment Report (May)
U.S. Nonfarm Payrolls (May)