Energy&Precious Metals - Weekly Review and Calendar Ahead

25/08/2019 10:52:18 Commodities

By Barani Krishnan

Ancient Chinese military strategist Sun Tzu says the most important factor in war is the "element of surprise".

Xi Jinping proved that right this week when the Chinese president caught rival Donald Trump off-guard in announcing new retaliatory tariffs on U.S. imports, particularly on a commodity sacrosanct so far in the trade war between them: crude oil. Trump was understandably livid, demanding that American manufacturers pull out of China – a call that might have worked 20 years ago.

The 5% tariff on U.S. oil imports threatened by Xi may or may not come true. But clumped together with Federal Reserve Chairman Jay Powell’s decision to keep markets in the dark over his interest rate plans – another pet peeve of Trump – it’s the last thing oil bulls need. Less-friendly access to the Chinese market can never be good for U.S. crude, which counts Asia, if not China itself, as its top regional destination.

Given the impact implied by the Chinese move, Friday’s 2% drop in West Texas Intermediate crude and the slide of less than 1% in Brent may be modest.

Unless U.S. crude stockpiles data show another impressive drawdown in the coming week – one of the remaining few left in the so-called peak summer driving season – it’s hard to see WTI popping up on the north side of $55 or Brent above $60. OPEC, of course, can continue baring its fangs at oil bears. But with U.S. shale supply not backing down as OPEC’s nemesis, it remains to be seen whether the cartel’s bite will be as potent as its bark.

Gold bugs, however, have none of these issues.

Despite Powell keeping markets on a guessing game over U.S. monetary policy, gold – incredibly – continues to shine, now as safe-haven against the intensifying trade war rather than a hedge against weaker rates.

Both spot gold, which reflects trades in bullion, and gold futures jumped 2% on Friday and look likely to hit new six-year highs above $1,550 – a position oil bulls would love to be in.

Energy Review

It was bad enough that Powell decided not to give investors a clue on where he thought interest rates were headed. China had to make it a one-two punch for oil and other markets on Friday, announcing an additional 10% tariff on $75 billion of U.S. products, including crude.

WTI fell $1.18, or 2.1%, to settle at $53.38 per barrel, reacting to the Fed's lack of clarity on rates as well as Beijing’s latest salvo in its tit-for-tat tariffs war with Washington.

Brent, the benchmark for oil outside of the U.S., slid 58 cents, or 0.8%, to $59.34, staying below the key $60 per barrel level.

Friday’s tumble was the sharpest one-day drop in WTI in 10 days. For the week, the U.S. crude benchmark was down 2.7%. Brent actually rose 1.2% on the week, adjusting for earlier gains.

Barring Friday’s move, oil prices could spend an extended time boxed in sideways trading, with the occasional spike up or down, due to the countervailing forces of the trade war and supply outages.

“Oil prices have entered the rocky ranges, trapped in a world of wild moves but still getting nowhere, as it appears lost in a range somewhere,” said Phil Flynn.

“Of course, the moves are compelling because whatever way we break out of this range could mean a major move. We think it will be to the upside, but technically it could be a big move to the downside.”

Reuters reported that the Chinese 5% tariff on U.S. oil imports could further soften demand for physical crude at hubs along the U.S. Gulf Coast, where exporters already have taken to shipping crude overseas without firm buyers.

Crude inventories in the PADD 3 region were at 225.1 million barrels last week, about 12.4 million barrels higher than the same week last year, according to U.S. government data cited by Reuters. Supplies have climbed as two new pipelines carrying U.S. shale from the Permian Basin opened last week, pushing key coastal grades to the lowest in a year.

Energy Calendar Ahead

Monday, Aug 26

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Aug 27

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Aug 28

EIA weekly report on oil stockpiles

Thursday, Aug 29

EIA weekly natural gas report

Friday, Aug 30

Baker Hughes weekly rig count.

Precious Metals Review

President Trump, who wants the Fed to cut interest rates by a full 1%, asked in a tweet this week who was actually the greater enemy of the American people: Chairman Powell or Chinese President Xi?

Powell’s decision to leave markets in suspense over the central bank’s upcoming rate moves ought to have led to lower gold prices on Friday. But China’s announcement of new tariffs on U.S. products and Donald Trump’s demand that U.S. companies pull out of the republic wasn't exactly the combination investors expected.

But longs in gold weren’t complaining anyway, because instead of a selloff, they got a rally.

Bullion was up $29.77 for a late trade of $1,527.89 on Friday.

Gold futures for December delivery settled up $29.10, or 1.9%, at $1,537.60 on the Comex division of the New York Mercantile Exchange.

When the dust settled, it was gold’s largest rally in three weeks, and the first in a while driven by safe-haven buying over China. The precious metal had spent much of early to mid-April in range-bound trading as longs in the market sought signs of Fed rate cuts to add to positions.

In recent weeks, bullion has also occasionally moved back and forth between $1,500 as some investors bet the Fed wouldn’t add to its dovish tone ahead of its closely-watched Aug 22-24 Jackson Hole conference.

That Wyoming meeting has come and gone, without any clarity over the Fed’s game plan on rates.

The U.S. economy is in a "favorable place" and the Fed will "act as appropriate" to keep the current economic expansion on track, Powell said at the Jackson Hole event.

Rate cuts weaken the U.S. dollar, making commodities priced in the greenback cheaper for the rest of the world. Dollar-denominated prices of raw materials such as gold often automatically rise after a rate cut, adjusting to the phenomenon.

The Fed cut rates last month for the first time in a decade, dropping 25-basis points. Markets are expecting the central bank to do a similar reduction in September, but Powell has so far given little signs it would comply. The Fed chair has faced relentless criticism and pressure from President Trump who accuses Powell’s slow action in cutting rates as the real reason for the slower-than-desired growth of the U.S. economy.

Precious Metals Calendar Ahead

Monday

German Ifo business climate

U.S. durable goods

U.S. Dallas Fed manufacturing

St. Louis Fed President James Bullard speaks

G7 meetings

Tuesday

U.S. S&P/Case-Shiller house price index

U.S. consumer confidence (CB)

Thursday

U.S. initial jobless claims

U.S. GDP Q2 2nd estimate

U.S. pending home sales

Friday

Eurozone CPI flash estimate

U.S. personal income/spending

U.S. Chicago purchasing managers’ index

U.S. consumer sentiment (UoM)