By Barani Krishnan
Investing.com - Another week, another sterling crude draw and the best weekly gain since July for the U.S. oil benchmark. All these may make crude appear like a winner.
The truth, though, is the oil market is at an inflection point where neither bull nor bear can probably tell with a great deal of accuracy where things are headed.
On the face of it, the recent fairy tale run of epic crude draws in the United States should unravel from here, given the end of the peak summer driving period.
Yet, instead of building from September, on some years, crude inventories have continued falling till October. Last year, for instance, after the drawdown of 5.8 million barrels in the penultimate week of August, for four weeks in a row stockpiles continued to decline for a cumulative 14.2 million barrels.
Hence, anticipation is strong among oil longs that the back-to-back inventory drops of 10 million and nearly 5 million barrels over the past two weeks will continue, albeit in a smaller way.
This is the good stuff for oil bulls.
Now for the bearish bit: The U.S. trade war with China, for all intent and purposes, is far from over.
While this week’s gain in oil was partly on the euphoria that Washington and Beijing were to restart negotiations in October, history has shown that such talks have often broken off to leave both sides in worse positions than before, and for tariffs to only go higher.
On Sept 1, the Trump administration began imposing a 15% tariff on an array of Chinese imports, after earlier move to install a 5% duty on U.S. crude -- the first of its kind. The United States also plans to increase to 30% from Oct. 1 the 25% duty placed on $250 billion worth of Chinese imports.
All these leave recession worries very much alive for global investors. Hence, “demand bears” are also remaining influential in oil, creating the whipsaw volatility seen throughout August.
On coming Thursday, OPEC’s Joint Ministerial Monitoring Committee meets in Abu Dhabi to review the 1.2 million barrels per day of production cuts that the cartel and its key ally Russia have carried out since December. After the review, the committee will also recommend to OPEC’s top leadership what else needs to be done to bolster oil prices. This can mean more market swings as traders try and interpret its words.
In gold, the situation is also tricky for longs as the impending Federal Reserve meeting between Sept 17 and 18 makes investors unsure of what to do till then. Will the Fed cut rates again as it did in July? Or will it stay this time? Gold’s $1,500 support depends very much on that outcome. The European Central Bank rate decision in the coming week will also help shape direction for gold.
Energy Review
It’s back to parsing the tea leaves for crude traders, after Fed chief Jerome Powell's vow to support U.S. economic growth helped oil prices on Friday to their biggest weekly gain since July.
The weekly gain of 2.6% came as back-to-back U.S. stockpile declines and a promised restart of trade talks also faced off with an impending seasonal decline in oil demand amid signs that some in OPEC were overproducing.
Powell's remarks Friday in Zurich that he saw little chance of a recession any time soon helped send stock prices higher and spread to the oil markets.
New York-traded West Texas Intermediate crude, the U.S. benchmark blend, settled at $56.52 per barrel. For the week, it rose 2.6%, its biggest weekly advance since July.
London-traded Brent crude, the international benchmark blend, extended its perch above the key $60 level, to $61.47.
Since August, crude oil has been whipsawed by volatility, with daily moves of more than 2% being the new normal.
Swiss bank UBS said last week the worsening demand outlook would push Brent down as far $55.
Frankfurt-based Commerzbank (DE:CBKG), meanwhile, cut its Brent crude forecasts by $5 a barrel to an average of $60 through the end of 2020.
WTI "should be just ‘sitting’ at $55 in my view and probably $59 in Brent,” Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, N.C., said in an email to Investing.com.
“But noise generated by CTA systematic trading and ‘algos-generated pain trades’ is driving the market as it reacts to the macro story, which in my opinion is largely moot for the oil space in the near term, until we can get a better feel for supply growth in 2020.”
Energy Calendar Ahead
Monday, Sept 9
Genscape Cushing crude stockpile estimates (private data)
Tuesday, Sept 10
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Sept 11
EIA weekly report on oil stockpiles
Thursday, Sept 12
EIA weekly natural gas report
OPEC Joint Ministerial Monitoring Committee Meeting
Friday, Sept 13
Baker Hughes weekly rig count
Precious Metals Review
Gold posted its second straight weekly loss on Friday, moving closer to the key $1,500 support, after the U.S. central bank chief downplayed prospects for a recession in the world’s largest economy.
Spot gold, reflective of trades in bullion, last traded at $1,507 per ounce on Friday, down 0.9% on the day after Federal Reserve chairman Jerome Powell said the most likely case was for the U.S. was a continuation of moderate growth. Bullion lost 2.2% on Thursday for its largest one-day decline in 2019.
Gold futures for December delivery settled at $1,515.50 per ounce on the Comex division of the New York Mercantile Exchange, also down 0.9% on the week. In Wednesday’s session, December gold hit a more than six-year high of $1,566.15. December gold settled down 2.2% on Thursday, its largest drop since January.
With the declines from Thursday and Friday, gold futures ended lower for a second week in a row.
Scores of investors, from day-traders to hedge funds and multi-billion dollar institutions, had piled into gold in recent months, looking for a hedge against collapsing bond yields, currency and equity market flux, sliding global rates, the Brexit scare and recession fears over the U.S.-China trade war.
Powell’s suggestion that the U.S. might be recession-proof debunked at least one pillar for gold’s support this year, though the Fed chair also kept alive hopes for another U.S. rate cut by saying the central bank was ready to “act as appropriate” to support the expansion of the U.S. economy.
"Recession is not a likely outcome for the U.S. or the global economy," Powell said as the nation’s jobs report for August came in less robust than expected.
Powell's comments came ahead of the Fed's two-day policy meeting scheduled for Sept. 17-18.
The Fed dropped 25 basis points at its last policy meeting in August and is expected to do the same in September, bringing rates to a range of between 1.75% and 2%. The Fed Rate Monitor Tool on Investing.com is giving a 92% chance so far for another 25-bp cut.
If that happens, gold could regain steam for an upward trek, possibly into $1,600 territory. If the Fed stays, then $1,500 support could become rather tenuous.
The European Central Bank’s rate decision on coming Thursday will, meanwhile, lend some direction for gold.