Energy & Precious Metals - Weekly Review and Calendar Ahead

Energy & Precious Metals - Weekly Review and Calendar Ahead  | May 24, 2020 07:34

Energy & Precious Metals - Weekly Review and Calendar Ahead

By Barani Krishnan - The June expiry has come and gone for U.S. crude and the WTI benchmark isn’t showing any sign of clambering beneath $30 per barrel. So far, so good for the oil bulls. 

The next stress test for the West Texas Intermediate will be the driving that’s taking place this weekend and whether it will translate to meaningful gasoline inventory draws in the coming week.

If the way the Americans have been raring to get back on the road for Memorial Day is any indication, then it should be another impressive run at the pumps this weekend —  though the coming week’s data from the Energy Information Administration will only cover gasoline consumption through Friday.

But how much exactly is needed to retain oil’s 250% upward momentum of the past month? Will the draws cited by the EIA be enough? Or has the market up too much? Some analysts seem to think so - even those on the bullish side.

“The tendency of the oil market to correct and top often happens ahead of holiday weekends. Still, this market deserves to correct,” Phil Flynn of Chicago’s Price Futures Group, who’s typically bullish on oil, said on Friday after crude prices fell for the first time in more than a week.

The slide came as top buyer China omitted its growth target for 2020 and also renewed its showdown with pro-democracy protesters in Hong Kong.

Adds Flynn:

“The historic turnaround from sub-zero pricing to an incredible comeback, it only stands to reason that the market may want to level off and consolidate as it tries to judge demand and the impact on what is the traditional start of the summer driving season, Memorial Day.”

Traders and investors will be on the lookout for anecdotal and other data on U.S. driving and gasoline usage between Friday night and Monday’s Memorial Day holiday, given the absence of a typical forecast on road trips for the occasion by the American Automobile Association. The AAA has said it is foregoing its annual Memorial Day drivers’ survey for the first time in 20 years, as the Covid-19 pandemic had made it impossible for it to gather appropriate data. Last year, some 43 million Americans took to the road last year for Memorial Day, the second-highest since 2005, the association said.

Another pertinent development in oil markets for the just-ended week was broker RBC Capital Markets’ decision to cut off USO (NYSE:USO) — the wildly popular ETF — from buying WTI futures to prevent a recurrence of the volatility that led to last month’s historic sub-zero prices during the expiry of then May spot contract.

RBC has informed United States Commodity Funds, the operator of the USO ETF, that they may no longer hold positions in or buy oil futures contracts until further notice, according to a Thursday SEC filing made by the ETF.  As a result of RBC's actions, USO says it may hold larger amounts of treasuries and cash, "which will further impair USO's ability to meet its investment objective," according to the filing.

Another thing that could weigh on oil in the coming week is the escalation in tensions surrounding China, the world’s largest crude buyer.

China's ruling Communist Party set in motion a controversial national security law for Hong Kong, a move seen as a major blow to the city's freedoms. The law to ban "treason, secession, sedition and subversion" could bypass Hong Kong's lawmakers.

The United States, on its part, has slapped sanctions on 33 Chinese companies and institutions, dialling up the tension amid the lowest point in US-Sino relations. The Trump administration also announced earlier this week it had approved a potential $180 million arms sale to China’s archrival, Taiwan, angering Beijing.

The Chinese National People’s Congress, meanwhile, announced Friday it has omitted its 2020 economic target, as fears of a second wave of Covid-19 infections in the world’s second largest economy added to global jitters over recovery. 

In gold, futures of the yellow metal began the week with promise, breaching $1,775 per ounce — its closest approach to the March high of $1,789 — before retracing those gains toward $1,735.

While gold’s long-term bull case seemed intact, daily ‘noise” from stocks and the dollar was weighing on the safe-haven, said analysts.

“It’s difficult to say whether we will be able to make new highs given the stock market strength, and the endless sideways price action over the past few months,” wrote Joshua Graves, strategist at RJO Futures in Chicago, on Friday.

Energy Markets Review

U.S. West Texas Intermediate crude’s front-month contract, July, settled down 67 cents, or 2%, at $33.25 per barrel.

Brent, the London-traded global benchmark for oil, slid by 93 cents, or 2.6%, to settle at $35.13.

Still, WTI finished up 13% on the week and Brent 8%, heading for a fourth-straight weekly gain that marks oil’s best winning streak since December.

WTI fell to a session bottom of $30.74 on Friday - its closest to testing the $30 support - on China tensions.

WTI rebounded from those lows after the weekly rig count published by industry firm Baker Hughes showed drillers cut another 21 oil rigs. The latest reduction brings to nearly 450 the number of rigs lost since the week ended March 18, when lockdowns over the coronavirus began earnestly in the United States and across the world after China started the phenomenon in January.

“Oil’s dynamics have undoubtedly improved, but the outlook is still highly uncertain and numerous risks lie on the horizon, even before you take recent tensions on China into consideration,” said Craig Erlam at New York’s OANDA. “There'll be nothing normal or straightforward about this recovery.”

Energy Calendar Ahead

Tuesday, May 26

Private Genscape data on Cushing oil inventory estimates

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, May 27

EIA weekly report on oil stockpiles

Thursday, May 28

EIA weekly natural gas report

Friday, May 29

Baker Hughes weekly rig count.

Precious Metals Markets Review

China’s stirring of the hornet’s nest on Hong Kong’s democracy sent safe-haven seekers piling into gold Friday, reducing the yellow metal’s weekly losses accumulated on the back of optimism over U.S. recovery from the Covid-19.

U.S. gold futures for June settled up $13.60, or 0.8%, at $1,735.50 per ounce after China's move to launch a controversial national security law for Hong Kong set Beijing in a collision path with the liberal southern territory.

Spot gold, which tracks real-time trades in bullion, settled up $7.57, or 0.4%, at $1,735.17.

For the week, gold futures were down almost $21, or 1.2%, while bullion dipped about $10, or 0.4%.

“Gold is a buy around $1,675, and a sell around $1,750 and it’s been that simple. Gold ETFs continue to expand for the 20th straight week with unrest in Hong Kong after China’s recent crackdown, and explosive federal government spending all reasons to be long gold,” wrote Graves, the strategist at RJO Futures in Chicago.

“The technicals though, again, seem to have the edge here. Traders right now need to position themselves for a neutral to moderately bullish outlook, and custom strategies based on market bias and risk tolerance.” 

* Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.





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