By Barani Krishnan
Investing.com – Volatility is the nature of the beast in commodities.
Yet, in the face of clear and convincing fundamentals, zig-zag price action isn’t typical.
But that’s exactly what oil bulls got this week after news of extended OPEC cuts and a renewed handshake between presidents Donald Trump of the U.S. and Xi Jinping of China that set forth a new round of talks aimed at ending more than a year of tit-for-tat tariffs and other trade offensives between the world’s two largest economies.
Even OPEC output at five-year lows and the seizure of an Iranian ship in the disputed British/Spanish territory of Gibraltar couldn’t produce a meaningful rally for the bulls. Instead, counteracting factors like mounting OECD crude stocks and a smaller-than-expected weekly U.S. draw reminded longs why Crude Oil WTI Futures above $60 and Brent over $70 may remain elusive for a while. Monthly reports from OPEC and the Paris-based International Energy Agency on Thursday should lend more price clarity.
With gold, good economic data proved to be bad news as bullion and futures of the yellow metal skidded below the key $1,400 level after a sterling U.S. jobs report for June deflated hopes for strong action by the Federal Reserve. Speeches on Thursday by four Fed bankers – John Williams, Raphael Bostic, Thomas Barkin and Neel Kashkari – should provide more direction on the central bank’s thinking on rates.
Energy Review
The year’s biggest events for oil – more OPEC production cuts and a possible resolution to the trade war – delivered more disappointment than joy for oil bulls this week.
With just one rallying session and two others in the negative, oil moved up again on Friday as U.S. markets reopened from the U.S. Independence Day holiday. But both U.S. West Texas Intermediate crude and U.K. Brent oil still posted weekly losses on lingering demand worries, despite promises of tighter OPEC supply extending into March 2020.
Oil prices were also down on the week on concerns that a potential breakthrough in U.S.-China trade talks at the G20 meeting in Japan might be bigger on hype than delivery.
WTI fell 1.6% on the week, its sharpest slide in 3 weeks.
Friday's oil-price drop came amid a stellar U.S. employment report for June that was believed by many analysts to trim the chances of a Federal Reserve rate cut later this month. The U.S. added 224,000 jobs in June versus a forecast growth of 160,000.
It was a turbulent week for oil which initially rallied on the feel-good news of progress in trade talks between the United States and China.
Also underpinning sentiment was Russian leader Vladimir Putin’s announcement that his nation and Saudi Arabia – the forces behind the OPEC+ pact – will continue leading efforts to shed 1.2 million barrels per day.
Adding to support was a Reuters survey showing OPEC oil output had sunk to a new five-year low in June with growing Saudi supply unable to cover losses in Iran and Venezuela due to U.S. sanctions and other outages.
Offsetting that were slides showing OECD overhang of oil stocks at 10 times higher to 2010-14 levels. That raised questions on whether nine months of extended OPEC cuts would be enough to rebalance the market.
A much smaller-than-expected decline in U.S. crude inventories for last week added to worries that demand may be fading even in the peak U.S. summer driving season.
Remarks in Beijing’s state media on Friday that China will not buy American agriculture products if the United States “flip-flops” again in future trade negotiations also undermined the positive tones on bilateral trade negotiations set by Trump and Xi.
Weak German industrial orders and a second monthly slump in U.S. factory orders in May compounded the bearish sentiment.
So intense were the worries over oil demand from a weak global economy that even reports that the British Royal Marines helped the authorities in Gibraltar seize an Iranian ship on Thursday did only a little to rally the market.
Spanish authorities said the seizure was made at the request of the United States. Authorities said they believed the crude oil was being shipped to a Syrian refinery in violation of European Union sanctions against Syria
Yet, Iran’s Foreign Ministry summoned the British ambassador to voice “its very strong objection to the illegal and unacceptable seizure” of its ship.
The market’s reaction? Bah!
Energy Calendar Ahead
Tuesday, July 9
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, July 10
EIA weekly report on oil stockpiles.
Thursday, July 11
EIA weekly natural gas report
OPEC monthly report
IEA monthly report
Friday, July 12
Baker Hughes weekly rig count.
Precious Metals Review
Good job numbers are killing gold longs' hopes for a rate cut.
A stellar U.S. employment report for June reset market expectations for a Federal Reserve interest rate reduction later this month, sending bullion and futures of gold back to $1,300 levels after their June flirting with near $1,500.
Spot gold, reflective of trades in bullion, fell nearly 1% on the week for its first weekly loss in seven, trading at $1,398.26 an ounce.
Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, settled at $1,396.70, losing nearly 1% on the week, its steepest decline in three weeks.
The U.S. added 224,000 jobs in June versus a forecast growth of 160,000. While unemployment is still at a near 50-year low, Friday's jobs growth was still the highest in five months.
Investing.com's Fed Rate Monitor Tool still suggests a 100% chance the Fed will cut its key federal funds rate from 2.25%-2.5% to 2%-2.25% at its July 30-31 meeting. Yet, some market participants were scaling back expectations that the rate cut is a certainty.
The market is "wondering now whether the rebound in employment growth has reduced the need for a rate cut in July, especially in light of trade talks between the US and China resuming”, said Fawad Razaqzada, technical analyst for precious metals and currencies at FOREX.com.
“We think not."
Razaqzada said next week's Consumer Price Index report and the European Central Bank's July 25 meeting could change matters.
If the ECB chose to cut rates unexpectedly at its meeting, then the Fed could follow, he said, "regardless of any further improvement in US data in the interim."
Precious Metals Calendar Ahead
Monday, July 8
German Exports (May)
German Imports (May)
German Industrial Production (May)
German Trade Balance (May)
Consumer Credit (May)
Tuesday, July 9
U.S. JOLTs Job Openings (May)
FOMC Member Bostic Speaks
Chinese CPI (Jun)
CNY PPI (Jun)
Wednesday, July 10
Britain Trade Balance (May)
U.S. Wholesale Inventories (May)
U.S. FOMC June Meeting Minutes
Thursday, July 11
German CPI
German CPI
BoE FPC Meeting Minutes
Continuing Jobless Claims
Core CPI (Jun)
Core CPI (Jun)
Core CPI Index (Jun)
CPI (Jun)
CPI (Jun)
CPI Index (Jun)
Initial Jobless Claims
Jobless Claims 4-Week Avg.
Real Earnings (Jun)
FOMC Member Williams Speaks
FOMC Member Bostic Speaks
FOMC Member Barkin Speaks
FOMC Member Kashkari Speaks
Federal Budget Balance (Jun)
China Exports
China Imports (YoY)
China Trade Balance
Friday, July 12
German WPI (YoY) (Jun)
EU Industrial Production (May)
India CPI (Jun)
India Industrial Production (May)
India Manufacturing Output (May)
U.S. Core PPI (Jun)
U.S. PPI (Jun)
Fed Monetary Policy Report
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