By Barani Krishnan
Investing.com – If oil traders weren’t too sure about direction coming into this week, they’re probably as clueless going into next week.
Volatility has whipsawed crude futures for a second straight week, with two days in the red and three in the black. The biggest swing happened back-to-back between Tuesday and Wednesday, where U.S. oil prices jumped 4% first on a delay in the tariffs on China before plunging 3% in the next session on recession fears and a surge in crude stockpiles. Separately, the CBOE oil volatility index had on Wednesday its biggest one-day move since Aug 1, surging 8%.
The gyrations came during a week of contradicting drivers for oil. On Friday, for instance, OPEC issued a damning report on oil demand for this year and next. But crude prices rose anyway for a weekly gain, after a “relief rally” in equities spurred by improved U.S. bond yields tamped down some of the volatility in oil.
China’s finance ministry said on Thursday it has to take necessary counter-measures to the latest U.S. tariffs on $300 billion of Chinese imports. The Trump administration’s tariffs violate a consensus reached by the leaders of the two countries to be on the right track for resolving disputes via negotiation, Beijing said.
Yet, within 24 hours, the Xi Jinping administration was saying it hoped to meet Washington halfway on the trade dispute. To be sure, Trump by Tuesday had backed off partially from his earlier plan to impose tariffs by Sept 1, delaying till December duties on some Chinese-made items such as cellphones, laptops and other consumer goods, in the hopes of blunting the impact of those on U.S. holiday sales.
“We have doom and a spattering of gloom,” said Phil Flynn, senior market analyst for energy at the Price Futures Group brokerage in Chicago.
“Bottom line, the oil market is trading on fear. Weak data overseas suggests that oil demand may slow. But actual numbers suggest that that slowing may be overstated.”
For gold, the Federal Reserve’s upcoming Jackson Hole symposium, and release of the central bank’s July meeting minutes, will decide a lot of the coming week’s action.
Risk appetite returned somewhat across markets last week after the yield on the 10-year U.S. Treasury moved back above that of the 2-year note, reversing the inversion that some economists said flagged a pending recession.
Analysts said safe-haven demand for gold remained strong, although the improved sentiment for equities and other risk assets were prompting investors to look again at core financials.
“Precious metals may have benefited from equity angst and recession fears this week, but the lack of bad news is spurring some consolidation,” TD Securities said in a note on gold.
Energy Review
New York-traded West Texas Intermediate crude settled the week up 0.7% at $54.87 per barrel.
London-traded Brent crude gained just 0.2% on the week. The benchmark for oil outside of the U.S. also remained below the key $60 per barrel mark, at $58.64.
Oil markets have been grappling with one of their worst periods of volatility as occasionally positive news on crude faced off with trade war threats, dismal economic data and inversion of the U.S. bond yield, which signaled recession.
TD Securities noted that “a relief rally” in risk assets helped alleviate some of the downside pressure in crude on Friday following a tumultuous week.
“We continue to see an elevated likelihood that CTAs will turn buyers on WTI crude, which could provide additional support to prices,” the brokerage said, using the abbreviation for Commodity Trading Advisors, a tag that typically refers to hedge funds.
Despite such optimism, OPEC said 2020 will likely see a supply surplus as rivals continue to increase production,
The Organization of the Petroleum Exporting Countries also cut its forecast for oil demand growth in 2019 by 40,000 barrels on pressure foreseen from a global economic slowdown.
That made the cartel sound more like its often-bearish cousin – the Paris-based International Energy Agency, or IEA, which looks after the interests of global oil consumers.
Energy Calendar Ahead
Monday, Aug 19
Genscape Cushing crude stockpile estimates (private data)
Tuesday, Aug 20
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Aug 21
EIA weekly report on oil stockpiles
Thursday, Aug 22
EIA weekly natural gas report
Friday, Aug 23
Baker Hughes weekly rig count.
Precious Metals Review
Gold bugs have seen many years of false starts, but they probably can’t be surer than now of the rally in the shiny metal.
Sought in both good times – think jewelry and other ornamental use – and bad – as a safe-haven against economic and political troubles – gold is having its best year since hitting record highs eight years ago.
Hovering at just below six-year highs at $1,525 per ounce, the benchmark gold futures contract on New York Mercantile Exchange’s Comex is up more than 15% year-to-date, for its best returns since 2011, when it set an all-time peak of $1,911.60.
Last week was the third consecutive week of gains for gold, and the 11th advance in 13 weeks.
Since the start of August, gold has gained over 6%, or about $90, on heightened trade tensions and sustained buying by central banks responding to a slew of disappointing economic data globally. Speculative support lent by hedge funds and indirect buying of gold via exchange-traded funds have been other major drivers of the rally.
The strong fundamentals for gold and relative price action has fed into gold’s technicals.
Investing.com’s puts Comex gold as a “Strong Buy” on its Daily Technical Outlook, projecting a top-end resistance of $1,599.24 in the near-term.
Some strategists, like Christopher Vecchio, see gold as having a top-end target of $1,820, which if Comex takes out, could set the stage for the yellow metal to match its current record or even write a new one.
Bank of America Merrill Lynch (NYSE:BAC), in a precious metals note issued this week, said central banks could still have a lot of buying to do in gold.
Others have less lofty targets for gold despite being somewhat bullish.
After daily rises of up to 2% or more in recent weeks, gold’s ascent has also slowed lately, with investors awaiting cues of more central bank easing, particularly from the Federal Reserve, before committing to more long positions.
Thus, Wednesday’s release of the Fed meeting minutes for July, along with the Thursday-through-Saturday Jackson Hole retreat, and Chairman Jay Powell’s speech, will be key.
Despite the largely bullish sentiment for gold, some technical strategists such as Michael Boutros see a potential retracement.
Last week’s settlement at below $1,526, from a trading standpoint, might be a signal to reduce long-exposure/raise protective stops, Boutros said. “Be on the lookout for possible exhaustion,” he added.
Precious Metals Calendar Ahead
Tuesday, Aug 20
German PPI (Jul)
Canada Manufacturing Sales (Jun)
U.S. FOMC Member Quarles Speaks
Wednesday, Aug 21
Canada CPI (Jul)
U.S. Existing Home Sales (Jul)
U.S. FOMC Meeting Minutes
Thursday, Aug 22
Eurozone Manufacturing&services PMIs (Aug)
U.S. initial jobless claims
U.S. services PMI (Aug)
U.S. Jackson Hole Symposium
Friday, Aug 23
U.S. Fed Chair Powell Speaks
U.S. New Home Sales (Jul)
U.S. Jackson Hole Symposium
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