Energy & precious metals - weekly review and outlook

Please attempt an alternative search.

Posted on July 2, 2023 at 5:12 AM Eastern Time

Investing.com -- It has arrived: The much-awaited month of July for oil enthusiasts. The forthcoming month holds a promising opportunity as the Saudi oil minister plans to bring about a change by implementing additional cuts of one million barrels per day in output. Consequently, this July is being eyed by some of the most positive analysts who predict that crude oil prices may surge to $90 or even higher per barrel.

Starting the positive communication of the Saudis and other oil manufacturers will be the seminar on July 5-6, where CEOs of the oil industry will gather with energy ministers from OPEC. OPEC, also known as the Organization of the Petroleum Exporting Countries, along with its allies OPEC+, which consist of Saudi Arabia and Russia, will be present. This alliance, consisting of 23 nations, is responsible for producing over 40% of the global oil output.

OPEC is once more excluding Bloomberg, Reuters, and the Wall Street Journal from covering the meeting in order to maintain authority over the way the event is portrayed. They previously took this action during the last OPEC+ ministerial gathering in June, demonstrating their intention to control the narrative.

Ed Moya, an analyst at the online trading platform OANDA, mentioned that the OPEC seminar will primarily revolve around providing insights into the Saudis' current thought process. He also highlighted that the pricing decisions made by Saudi Aramco for the upcoming month of August will serve as a crucial indicator of the severity of the demand downturn or the possibility of them aligning their prices with those of Russia.

The argument supporting the rise of oil in the latter half is based on the belief that Saudi Arabia, a significant oil producer, will significantly decrease output. This action is anticipated to raise the price of Brent crude above $80 per barrel and bring the price of U.S. crude to a minimum of $75.

The WTI, which is traded in New York, experienced a decrease of almost 7% during the second quarter and ended the first half of the year 14% lower at $70.64 per barrel. On the other hand, Brent, which is traded in London, concluded the quarter with a decline of approximately 6%, and the first half saw a drop of nearly 13% with a closing price of $74.90.

The leaders of OPEC+, mainly comprised of Saudi Arabia, have declared on three separate occasions since October that they will reduce their production, with the intention of removing 2.5 million barrels per day from their total output. As a result, by July, their daily production is projected to be approximately 9 million barrels.

However, the prices of crude oil have only experienced temporary increases following these announcements, as the actions taken by the Federal Reserve and other central banks have emerged as a more significant influence on the oil market. This is due to concerns within the industry regarding a potential global economic downturn, which could adversely affect the demand for energy.

According to Phil Flynn, an energy analyst at the Price Futures Group in Chicago, the initial part of the oil narrative depicts dissatisfied oil investors who are worried about increasing interest rates. Additionally, Federal Reserve officials are guaranteeing an economic slowdown while banks are experiencing failures. Moreover, there are concerns regarding the perceived decline in Chinese oil consumption and the difficulty in controlling the supply of oil from Russia and Iran due to existing sanctions.

According to insider information from trading sources, China is set to begin the distribution of approximately 10 million barrels of oil. This oil was imported from Iran and Venezuela and has been sitting at ports for several weeks, facing closer examination during cargo inspections. Reuters reported this news on Wednesday.

Flynn, a fervent oil optimist, though believes that the latter part could present a narrative that is quite distinct, with a tremendous potential for crude oil and benefiting those who are invested in the market. The existing surplus of supply may transform into a substantial shortage.

A group discussion that took place on Wednesday, organized by the European Central Bank and attended by the leaders of the Federal Reserve, Bank of England, and Bank of Japan, revealed that almost everyone agreed on the need for elevated interest rates in order to control the unexpectedly high inflation.

On Thursday, the Chair of the Federal Reserve, Powell, continued his statement by addressing a banking event in Madrid. He mentioned that the central bank of the United States is currently aiming to determine the appropriate interest rates that will effectively control both economic growth and inflation, without leading to unnecessary decline in stability.

The Federal Reserve, eagerly looking forward to July, has been closely monitoring all aspects of the economy - ranging from the job market to inflation caused by the rise in energy prices. They will make a decision on interest rates during their meeting on July 26.

Setting the stage for the Federal Reserve are two distinct American data points: the performance of the economy in the first quarter and the upcoming inflation report. These factors might influence the central bank's decision on whether to raise interest rates in the coming 3-½ weeks or continue with the current pause in tightening monetary policy, which was established on June 14.

The Commerce Department revealed that the United States' Gross Domestic Product (GDP) experienced a growth of 2% on an annualized basis during the initial quarter of this year. This information is anticipated to bring further relief to the Federal Reserve, as it suggests that the rate hikes implemented over the past year did not heavily burden economic growth.

Economists surveyed by American media had predicted an average annual growth of merely 1.4% during the January-March span. The Commerce Department's earlier approximation of growth for the quarter stood at a mere 1.3%.

The Federal Reserve has been aiming for a "gentle descent" of the economy, which essentially means a decrease in GDP growth rate that is not negative. The most recent outcome for the quarter suggests that the central bank may achieve its desired outcome.

Mitigating some of the cautious sentiment from the Federal Reserve was the most recent report on the Personal Consumption Expenditures Index (PCE), which was published on Friday. The PCE, a widely monitored gauge by the Fed, experienced a 3.8% growth from May of the previous year, falling below the significant 4% threshold for the first occasion in over two years.

The Federal Reserve is only willing to accept inflation rates of up to 2% every year. Since the COVID-19 pandemic ended in March 2022, the central bank has increased interest rates by 5%. This action has pushed interest rates to a maximum of 5.25% in an effort to restore inflation to its desired level.

MarketWatch stated in a commentary shortly after the release of the PCE report by the Commerce Department that although inflation is decreasing, it is still above the desired level for the Federal Reserve. Top officials at the Fed are concerned that the increase in labor expenses and the rising costs of housing and other significant sectors of the economy may lead to sustained high levels of inflation for a few more years.

Therefore, it is anticipated that the Federal Reserve will increase interest rates by an additional 0.25% on July 26, bringing them to a maximum of 5.25%.

Oil Price Forecast: WTI Analysis

Sunil Kumar Dixit, the chief technical strategist at SKCharting.com, suggests that for WTI to experience significant upward movement in the upcoming week, it must approach the 100-day SMA, which stands for Simple Moving Average, currently valued at $73.90. This coincides with the weekly Middle Bollinger Band that shares the same value.

Dixit stated that if the current level of sustainability continues, it will gradually progress towards the next stage of advancement. This next stage is represented by the 200-day SMA, or Simple Moving Average, at a value of $77.50, and the 50-week EMA, or Exponential Moving Average, at a value of $78.80.

Alternatively, if the 200-week Simple Moving Average (SMA) of $67.50 is targeted once again, this may lead to a further decrease in the West Texas Intermediate (WTI) price, potentially reaching $63.70. This downwards trend would expedite its correction and bring it closer to the significant support area, which is supported by the 100-month SMA of $59.65.

Gold Market: Settlements & Activity

Gold reached the halfway point of the year with a rise of approximately 5% in both futures trading and the current value of precious metal. However, the grip of the yellow metal on the $1,900 support is weakening due to concerns over the possibility of the Federal Reserve implementing further increases in interest rates.

The Comex in New York concluded the week with a final trade of $1,927.80 per ounce on Friday. The session officially settled at $1,921 per ounce, marking an increase of $11.50 or 0.6% for the day. The lowest point reached during the day was $1,908.15, which was slightly higher than the three-month low of $1,900.60 experienced on Thursday. Over the course of the week, the benchmark gold futures contract saw a 0.4% increase. Throughout the month, it rose by 2.7%, and for the year, it showed a gain of 4.7%.

The blog post covers the price of bullion, which is monitored more closely by certain traders than futures. The closing price of bullion was $1,919.62, showing an increase of $11.34 or 0.5%.

On Friday, the price of gold rose as those who are optimistic about the gold market found hope in the small increase of 3.8% in the main measurement of inflation known as the Personal Consumption Expenditures (PCE). Prior to this, the index had increased by 4.3% over the 12 months leading up to April.

However, when excluding the impact of food and energy prices, the data still revealed a yearly increase of more than 4%. In May, this particular aspect experienced a growth of 4.6%, slightly below the predicted 4.7% and the officially recorded growth rate for core PCE in April.

The Federal Reserve closely monitors both the overall and underlying Personal Consumption Expenditures (PCE) to determine the appropriate course of action regarding interest rates.

According to Dixit from SKCharting, the price movement of spot gold has entered a more significant correction phase, falling to $1,893 throughout the week. However, there was a slight recovery on Friday which pushed it back up to $1,900.

Dixit stated that the future seems pessimistic in the medium term since the 5-week EMA is currently situated at $1,938 and may potentially cross over the Weekly Middle Bollinger Band of $1,948. This crossing could suggest that there is enough momentum for the bears to continue exploring further downside movements.

The expected near-term range for spot gold is set at $1,938-$1,948 towards the higher end and $1,888-$1,860 towards the lower end.

According to Dixit, if sustainability remains below the 5-week EMA of $1,938 in the upcoming week, the bearish momentum will continue and there is a chance that the price will retest the low of $1,893 and the 50-week EMA of $1,888.

To continue rising, gold needs to surpass the hurdle of $1,948 initially, followed by additional obstacles at $1,975, $1,958, and $1,968, according to his statement.

"If the bulls do not manage to convincingly achieve a rebound above $1,948, it is highly probable that we will see a further decline towards the 200-day SMA at $1,860. A significant level of support can be found at the monthly Middle Bollinger Band located at $1,835," Dixit commented.

Gas Market: Prices And Trade

The cost of natural gas decreased by almost 40% by the middle of the year. However, with the future prices of this fuel showing the highest monthly increase in a year, traders are feeling more positive about the remaining months. This optimism is fueled by the expectation of increased demand for gas-powered cooling systems as the summer heat intensifies.

The highest trading activity on the Henry Hub of the New York Mercantile Exchange concluded with a final price of $2.774 per mmBtu, or million metric British thermal units, on Friday. It officially came to a close at $2.7980 after increasing by 9.7 cents or 3.6% throughout the day.

Gas futures experienced a 2.5% increase over the course of the week, followed by a substantial 24% rise throughout the month. Impressively, they recorded a 26% surge during the quarter. However, disappointingly, they faced a significant loss of 37% over the course of the year.

The natural gas market has been quite intriguing lately, as the bulls have successfully maintained a positive standing throughout June, despite the fluctuating temperature patterns nationwide.

However, the rally has also been a gradual process due to extreme temperatures in the southern regions compared to the favorable conditions in the northeastern areas. Additionally, the maintenance of liquefied natural gas (LNG) has affected the rally, although there is still considerable gas production and generation of renewable energy.

Although it is not yet scorching hot across the nation, the need for cooling is gradually increasing, especially in Texas. This has led experts to recognize that lower price levels may become more frequent compared to reaching new all-time lows. The lowest price for Henry Hub's front-month contract this week reached $2.138, slightly higher than the $2.136 low observed at the beginning of June.

Data from Refinitiv, the data division of Reuters, revealed that the air-conditioning demand indicators indicated the presence of approximately 65 cooling degree days (CDDs) last week. This figure is fairly close to the 30-year average of 70 CDDs for this time period.

CDDs are employed to assess the demand for cooling residential and commercial spaces. They evaluate the excess temperature of the average daily temperature in comparison to 65 degrees Fahrenheit.

In the meantime, there has been a smaller increase in energy reserves than anticipated. The Energy Information Administration (EIA) released an update on Thursday, revealing a growth of 76 billion cubic feet (bcf) in the most recent week until June 23. Analysts in the industry, monitored by Investing.com, had predicted a growth of 83 bcf, compared to the previous storage level of 95 bcf for the week until June 16.

Following the recent increase in stock gains, the overall quantity of gas stored in inventories throughout the United States reached 2.239 trillion cubic feet, otherwise expressed as tcf. This represents a substantial rise of 25.3% compared to the corresponding week from the previous year, and it also surpasses the five-year average by approximately 14.6%.

Gas Price Forecast

According to Dixit from SKCharting, if the bullish trend continues, the price of gas could reach $3.75, which is the 200-week Simple Moving Average, in the upcoming week. The next target after that would be the 50-week Exponential Moving Average at $3.82.

According to Dixit, as long as the price action adheres to the 5-week EMA of $2.60, the upward trend in gas will continue. However, if the price drops below that level, it could cause prices to decline towards the Weekly Middle Bollinger Band, which stands at $2.37.

The expected gas price range in the near future is approximately $3.00 to $3.25 at the higher end and $2.60 to $2.37 at the lower end.

Please note that Barani Krishnan does not have any financial investments in the commodities and securities he discusses in his writings.