Energy & Precious Metals - Weekly Review and Outlook

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Energy & Precious Metals - Weekly Review and Outlook
Credit: © Reuters.

By Barani Krishnan

Investing.com -- Fears of a recession and a seemingly ruthless Federal Reserve have wreaked havoc this month, with U.S. crude posting back-to-back weekly losses for the first time since April even as the S&P 500 returned to a weekly green.

While the bull culture of markets demands that what goes down must (eventually) come up, both U.S. housing and jobs data aren’t yielding to the Fed yet, signaling more rate angst to come.

Sales of new homes in the United States jumped almost 11% in May from a month earlier, according to data on Friday from the Commerce Department that overshot economists’ forecasts and underlined the Fed’s difficulty in restraining demand in a sector contributing to runaway inflation.

Inflation, as indicated by the Consumer Price Index , or CPI, was at a four-decade high of 8.6% in the year to May versus the Fed’s target of 2%.

Housing-related components make up about 30% of the CPI’s structure, economists say.

Demand for housing isn’t collapsing yet despite home prices in the U.S. surging by some 37% over the past two years. Mortgage rates have, meanwhile, risen from 3.2% to 5.88% in the past six months. The combination has pushed up the cost of home ownership to the highest in a generation.

Yet the American consumer appears incredibly resilient to such pressures, with U.S. household consumption accounting for around 68% of aggregate expenditure even after gross domestic product declined 1.4% in the first quarter. This is the kind of strength, economists say, that could help GDP tread water and avoid a recession in 2022.

San Francisco Fed Chief Mary Daly indicated that on Friday, saying “a slowdown in housing would be welcome”. For a central banker who’s typically dovish, Daly suggested that it would be good for the Fed to “front-load” rates and get expectations out of the way.

“When markets price in an increase of 75 basis points, let's get that increase in,” Daly said, suggesting the Fed do in July a repeat of the largest rate hike in 28 years it performed just earlier this month.

“Policy is on a fast track to neutral by the end of the year,” she added.

“Neutral” is Fed speak for bringing interest rates to parity with inflation, in order to stop price pressures from going any higher. The Fed is determined to have key lending rates now at 1.5-1.75% raised to 4.5-4.75% by December. It also intends to start selling bonds in its hold to bring down inflation even faster.

Ditto with the jobs market.

While weekly U.S. jobless claims are no longer giving the central bank too much worry - barely moving on either side of 230,000 the past three weeks - it’s wage growth that really needs to come down.

U.S. wages have risen month after month since April 2021, expanding by a cumulative 6.1% over the past 14 months, or an average of 0.4% a month. That mismatch has further complicated the central bank’s efforts in balancing the economy as jobs and wage growth have been significant contributors to inflation.

“If supply continues to fall short and inflation remains high, we will need to do more; otherwise, we will need to do less,” Daly said, adding: “Additional tightening beyond neutral is likely as the next step.”

Oil: Market Settlements and Activity

Longs in U.S. crude saw their first back-to-back weekly loss since April amid recession fears that could pose a greater challenge than thought to the energy sector despite typically busy summer travels.

It was also an unusual week for those in the oil trade, with the regular inventory report from the U.S. Energy Information Administration missing due to “power issues”. Bloomberg said the report will run next week instead, meaning there will be two EIA reports in the coming week.

New York-traded U.S. West Texas Intermediate , the benchmark for U.S. crude, settled Friday’s trade at $107.06 per barrel.

While that was a gain of $2.79, or 2.68%, on the day, it was not enough to deliver a weekly profit for those who had bought into the market a week earlier, when it closed at $109.56. For these investors, the U.S. crude benchmark, known by its initials as WTI, delivered a weekly loss of 1.8%.

Factoring in the previous week’s tumble of 9.2%, it was WTI’s first back-to-back weekly loss since April. Prior to this, it had rallied non-stop seven weeks in a row.

London-traded Brent crude, the global benchmark for oil, meanwhile, settled Friday’s trade at $113.19 - up $3.14, or 2.8%, on the day. For the week though, Brent ended flat, after the prior week’s decline of 7.3%.

Notwithstanding their latest moves, WTI remains up 47% on the year after six months of gains through May while Brent shows an annual rise of nearly 45%.

Despite that and the optimism over summer travel, oil prices had buckled in the past fortnight “under the weight of recession fears and positioning”, said Scott Shelton, energy futures broker at ICAP in Durham, North Carolina.

“I feel like oil should be much higher than this but then again, I … recognize that most of the bulls are struggling and quite frankly out of patience in many cases due to volatility and nearly a $20 drop in a very short period of time,” added Shelton.

Just two weeks ago, WTI hit three-month highs of above $123 a barrel while Brent scaled similar peaks breaching $125.

Since then, the Fed, has threatened to spoil the show for oil longs.

On the oil front, gasoline stubbornly sticking at around $5 a gallon hasn’t quite destroyed demand among U.S. drivers in the run-up to the country’s peak summer season for road trips.

It’s the same story with air travel despite higher ticket prices for fliers and costlier jet fuel for carriers.

American consumers spent $6.6 billion in February booking airline tickets during the spring break, according to data compiled by Adobe Analytics. That was 6% higher than in February 2019, and up 18% from January of this year.

Through the first 15 days of May, spending by airlines rose 24% compared to 2019 while bookings were up only 3%. The gap between spending and bookings "highlights the effects of persistently high prices,” Adobe said.

Oil: Price Outlook

By settling above the 100-Day Simple Moving Average of $102.30 and below the 50 Day Exponential Moving Average of $209.30, WTI stays within striking range of a breakout next week, says Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“A sustained move above the 100-Day SMA of $102.30 will keep oil moving up towards the 50-Day EMA of $109.30, which is the acceleration point for a further upside towards $111.50 and $113.50,” said Dixit.

He said such a move will be influenced by the SMA and EMA levels’ positive overlap with the Daily Stochastic reading for WTI, which currently stands at 24/16.

On the flip side, a rejection from $109.30 will weaken WTI’s momentum, Dixit said.

“You may then see a push toward the $105-$102 levels, and this could extend selling towards the $98-$95-$92 areas,” he added.

Gold: Market Settlements and Activity

Bulls in gold logged a second weekly loss as the yellow metal trod water at mid-$1,800 levels amid a keen watch of the Federal Reserve’s next rate move, as U.S. inflation barely budged from 40-year highs.

Front-month gold futures for August on New York’s Comex was virtually unchanged, settling at $1,828.10 an ounce.

For the week though, the benchmark U.S. gold futures contract was down 0.6%, following through with the prior week’s decline of 1.9%.

“Gold remains trapped in a range as traders wait to see if the latest inflation reports will force the Fed into committing to more massive rate hikes beyond the July policy meeting,” said Ed Moya, analyst at online trading platform OANDA.

Markets from stocks to bonds and oil have been whipsawed by volatility in the past fortnight as investors await to see if the Fed will continue to aggressively hike rates in its bid to thwart inflation.

Gold is supposed to be a hedge against inflation and it typically rallies when investors become worried about a reduction in the purchasing power of the dollar. The best proof of gold’s standing as an inflation hedge was when it got to all-time highs of above $2,100 in August 2020 and again to above $2,000 between March and April this year.

But gold’s correlation with inflation has also not been perfect as its prices have also broken down numerous times when inflation data came in higher.

While some have put that down to market manipulation, further confounding the hedging theory is the joint rally by gold and the Dollar Index at times as inflation concerns propped up bullion prices amid a run-up in the greenback and Treasury yields on expectations of Fed rate hikes.

Despite those breakdowns, analysts are confident that gold would continue finding support at $1,800 and above in the near term.

“Gold should see strong support at the $1800 level as global recession fears should support strong buying of Treasuries at the long-end of the curve,” said OANDA’s Moya, cautioning, however, that “bullion rallies may find resistance at the $1,840 area.” ​

Gold: Price Outlook

As the range in gold becomes increasingly shorter, pressure to break out on either side of the trend is rising, said Dixit of skcharting.

“As long as the metal sustains above $1,815-$1,820, some positive retracement towards the $1,830-$1835 levels initially and later toward the $1,844-$1,850 resistance cluster is likely,” said Dixit, who uses the spot price of gold for his charting.

Failure to move above $1,830-$1,835 could snap the upside momentum, and send gold back towards $1,810-$1,800 initially and $1,790-$1,780 eventually, Dixit cautioned.

“The week-long price action in spot gold showed a $32 move cradled within the previous week's engulfing range and settled in continuation of a negative pattern,” he added.

Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.

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