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Energy & precious metals – weekly review and outlook

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Energy & precious metals - weekly review and outlook
© Reuters.

Investing.com – Has U.S. gasoline demand peaked for this time of year? Well, that’s what the Labor Day holiday supposedly says. 

To be sure, the Energy Information Administration, or EIA, reminded us in its “This Week in Petroleum” report that the Sept 2-4 holiday weekend marks the unofficial end to the U.S. summer driving season. 

As of Friday, average pump prices of gasoline listed by the American Automobile Association, or AAA, weren’t far either from year-ago levels, signaling a calm market.

But a look at the futures markets for petroleum suggests this could be more like the calm before the storm, with crude prices rising 7% on the week. 

And, quite literally, it is the storm season, with Idalia, the first major hurricane of this year, pummeling Florida with a surge of seawater on Wednesday that flooded neighborhoods along much of the state’s western coast, cut power and leveled trees. 

But the damage inflicted by the Category 3 hurricane when it made landfall on Wednesday morning could have been far worse. By a stroke of meteorological good fortune, Idialia came ashore in a marshy and thinly populated part of Florida, southeast of Tallahassee.

Hurricanes often damage oil refineries, causing prices of fuels like gasoline to soar. Idalia was also an exception on this front, pulling it away from most Gulf of Mexico refineries. In fact, the net effect of the hurricane was actually negative to fuel prices.

In 2017, Hurricane Harvey triggered major refinery outages and brought enough damage to oil industry installations that forced some to close. More than 4 million barrels of refining capacity went offline temporarily from a refining capacity of some 18 million. Gasoline prices rose about 20 cents per gallon in the days afterward.

Hurricane Ida in 2021 was also responsible for energy disruptions and carnage. 

As the impact of this week’s Hurricane Idalia passes over, business activity in Florida and Georgia will likely decline for a few days. Florida alone accounted for about 6.6% of U.S. gasoline consumption and 3.9% of diesel consumption as of 2021, according to Tudor Pickering Holt analyst Matthew Blair, who used data from the Energy Information Administration. Blair, in comments carried by Barron’s, said he expects the hurricane to be “a small headwind for the refining space.” 

While refiners’ margins are below the record levels they hit shortly after Russia’s invasion of Ukraine last year, they have stayed strong as jet fuel demand has risen and economic activity in several parts of the world has rebounded from the days of COVID-19 restrictions. Some refinery outages – not related to hurricanes – have also reduced capacity.

Diesel cracks, or the margin between the cost of oil and diesel, have rebounded above $50 from below $20 in May, according to Bank of America.

“Since [May], diesel cracks have performed exceptionally well, as persistent refinery issues and a recovery in jet fuel demand offset soft diesel consumption, keeping inventories tight,” wrote Bank of America analyst Francisco Blanch.

Notwithstanding that, distillates, represented by , fell 6% on the week. lost even more – 9%. 

The EIA’s reporting of weekly fuel stockpiles could be reason for this, with the agency citing a of 1.235M, against a forecast of 0.189M and a previous weekly gain of 0.945M. 

For , the decline was well below expectations, with a drop of 0.214M versus the forecast slide of 0.933M and the previous week’s pull of 1.467M.

Only crude prices had an outsized rally – reacting to a large U.S. inventory decline for a third week in a row and on expectations that the Saudi production cut of one million barrels per day will run into a fourth month in October. 

“Everyone’s looking at the flat price of crude oil and saying gasoline and diesel prices will also go to the moon,” said John Kilduff, founding partner of New York-based energy hedge fund Again Capital. “But fuel uptake for this summer is still very much down to earth, higher than a year ago, yes, but still below pre-pandemic levels.” 

“You have an odd situation where the Saudis are trying to create a supply situation even lower than the seasonal lows in demand,” Kilduff continued. “All I’ll say is don’t test the mettle of consumers and the global economy because when either collapses, your dream of higher and higher prices will also go with that.”  

The four-week average of U.S. gasoline consumption – the best gauge of fuel demand –  was at 9.033M barrels per day for the week ended Aug. 25 versus the year-ago level of 8.874M. 

But consumption is still well below pre-pandemic levels, with 9.777M barrels used daily for the comparative week to Aug 23, 2019.  

The National Oceanic and Atmospheric Administration, or NOAA, which flags all major weather changes in the United States, listed just a couple of storm threats in the Atlantic this week, after the passing of Idalia. But it’s still very early in the hurricane season, and the threat of carnage cannot be underplayed.

In 2022, a total of 17 hurricanes were recorded, with three of them – Ian, Nicole and Fiona – bringing extensive damage to Florida’s coast and to Puerto Rico.

Ian was the sole storm that season to significantly disrupt offshore oil production in the Gulf of Mexico. About 11% of production in the Gulf was shut-in by September 27 in preparation for the storm, which hit the area as a category 4 hurricane.

Oil companies evacuated personnel from 14 platforms and rigs in anticipation of the storm, and approximately 190,000 barrels of oil per day in production were lost as a result of the disruption.

Tankers and vessels also cleared the eastern region of the Gulf of Mexico.

These measures meant that, although production was affected, no crew members were reported lost or injured as a result of Hurricane Ian or any other named storm in 2022.

This is a far cry from 2021, when the crew of the Noble-owned and Shell-leased drillship, Globetrotter II, was left to weather Hurricane Ida. Her crew of 142 were tossed about, believing they were going to capsize and sink, as 150-mph winds and 80-foot waves battered the vessel. The Coast Guard was able to rescue all of the crew members, but not before they suffered significant mental and physical trauma.

In 2020, Hurricane Zeta nearly claimed another rig, Transocean’s Deepwater Asgard.

As I said in my previous post, hurricanes haven’t left too much of a toll on the U.S. oil industry over the past three years. With Mother Nature’s will, this year won’t be an exception.

Oil: Market Settlements and Activity 

New York-traded West Texas Intermediate, or , crude did a final trade of $86.05 per barrel on Friday after officially settling the session at $85.55 per barrel – up $1.92, or 2.3%. For the week, the U.S. crude benchmark finished up 7.2%. That was after a combined 4% drop over two prior weeks as the economy in top importer China sputtered. Prior to that, WTI gained 20% over seven weeks. 

London-traded did a final trade of $88.99 per barrel on Friday after officially settling the session at $88.55 – up $1.72, or 2%. For the week, Brent rose 4.8%. That was after a combined 2.3% drop over two weeks. Prior to that, the global crude benchmark rose for seven weeks in a row, gaining a total of 18%.

Oil: WTI Technical Outlook

The U.S. crude benchmark is veering towards an overbought situation and in need of a correction to resume a healthy rally, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Momentum has reached a critical inflection point with limited room for further upside, which will have to retest the monthly middle Bollinger Band $86.80 as target,” said Dixit. “This is very likely to witness selling pressure as short-term price action reaches overbought conditions.”

On the flip side, a strong consolidation above the monthly middle Bollinger Band $86.80 could open the way for the next bullish wave towards the Nov 2022 high of $93.70, Dixit said.

But a more likely scenario is a temporary pullback towards the horizontal support zone of $84.90 – $84.40, he said.

This could even extend towards $82.40 and the Daily Middle Bollinger Band of $81.40 which would do well for WTI, Dixit added. 

Gold: Market Settlements and Activity 

Gold prices neared a one-month high Friday before consolidating to end the week up just over 1% after a mixed U.S. jobs report for August, where payrolls came in higher than forecast but unemployment also rose, touching 18-month highs.

The U.S. economy added 187,000 last month against a forecast 170,000 while the jobless rate perked to 3.8% from a previous 3.5%, the Labor Department said. The mixed reading conveyed the messaging that the Federal Reserve might not immediately resort to more to bring inflation to its long-standing target of 2% per annum from the about 3% it hovers at now.

In Friday’s trade, gold futures’ most-active on New York’s Comex did a final trade of $1,966.20 on Friday, after officially settling the session at $1,967.10, up $1.20, or 0.06%. The session peak for December gold was $1,981.70 an ounce, its highest since Aug. 7. For the week, it rose 1.4% despite falling 2% for all of August.

The , which is more closely followed than futures by some traders, settled at $1,940.28 an ounce, up 16 cents, or 0.01%. Earlier in the session, the spot price, which is reflective of real-time trades in bullion, rose to less than a penny off $1,953, its highest since Aug. 2.

Gold rallied then settled off its highs as the non-farm payrolls for August, at the least, “signal interest rates may not rise any further”, something all risk assets seemed to take positively, said Craig Erlam, analyst at online trading platform OANDA.

The Fed has three more opportunities to raise rates this year, with its policy-making Federal Open Market Committee having rate decisions scheduled on September 20, November 1 and December 13. 

With jobs still growing more than expected each month, the central bank could opt for one or two more hikes this year. 

Yet, any growth in unemployment as well, as evidenced in August, will complicate the Fed’s decision-making process on this. Aside from keeping inflation at or below 2%, the central bank is mandated by the US Congress to provide maximum employment to Americans – a target identified by a jobless rate of 4% or below. Last month’s unemployment rate of 3.8% was the highest since February 2021.

“The November [rate] hike odds are down to 36% and once that hits zero, there are no hikes to ‘price out’ any longer and it will become a waiting game for [interest rate] cuts,” economist Adam Button said, commenting on ForexLive platform. 

The Fed has vowed not to cut rates so long as inflation stays above 2%, setting the central bank up for what could possibly be a protracted battle in achieving its target.

The changes suggest the Fed would have to ponder more deeply on how to proceed with interest rates as it targets for inflation to return to the annual 2% or less level seen before the COVID-19 outbreak in March 2020.

Inflation rose as much as 9.1% year-on-year in June 2022, hitting four-decade highs as the government spent trillions of dollars fighting the pandemic. As of last month, had moderated to an annual growth of 3% after the Fed raised interest rates to 5.5% from a base rate of just 0.25% in March 2022. While pandemic-related spending is now over, robust jobs growth and wage growth are keeping the Fed from achieving its 2% target for inflation, the central bank said.

Gold: Spot Price Outlook 

Spot gold had a second week of advances but still fell short of a finish that would have positioned it for a greater run higher, said SKCharting’s Dixit.

“Unconvinced traders failed to establish a day/week closing above the 200-day SMA, or Simple Moving Average, of $1,954 and the descending Weekly Middle Bollinger Band of $1,951,” he said. “Thus, the spot price settled at $1,939.”

Going into the week ahead, the 50-day EMA, or Exponential Moving Average, of  $1,931 presents active support, Dixit. “A consistent break below $1931 will ease the path for a drop to the 200-day SMA, or Simple Moving Average, of $1,914.” 

On the positive side, stability above $1,942-$1,945 will favor a retest of the $1,951-$1,954 level.

“Strong acceptance above this zone will eventually extend the bullish momentum targeting $1,965,” said Dixit. “Failure to establish above $1,954 will eventually resume the downward correction.”

Natural gas: Market Settlements and Activity 

The front-month on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.762 per mmBtu, or million metric British thermal units on Friday after officially settling the session at $2.765, virtually flat on the day.

For the week though, October gas jumped 22.5 cents, or 8.85%. The U.S. gas benchmark also scaled a three-week high of $2.865 in Thursday’s session.

Natural gas: Technical Outlook

Dixit of SKCharting noted that in yet another bullish weekly rebound, natural gas had the descending 200-day SMA perfectly aligned with the swing high of $3.00 psychological handle.

“If this zone is successfully cleared with price action stability above the line, expect to witness gains reaching overhead resistance at the monthly Middle Bollinger Band of $3.25,” said Dixit. “Our major upside target is the 50-week EMA of $3.46.”

A break below the 5-day EMA of $2.70 will be the first sign of exhaustion for the current upside in gas, followed by a drop to the 50-day EMA $2.60 and the weekly Middle Bollinger Band of $2.50.

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

Commodities

Oil prices advance on tighter supply outlook

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By Ahmad Ghaddar

LONDON (Reuters) – Oil prices firmed on Thursday, following two consecutive sessions of decline, as investors saw a tighter supply outlook ahead, while the OPEC+ producer alliance was widely expected to stay the course on its current production cuts.

Brent crude futures for May were up 91 cents, or 1.1%, at $87 a barrel while the more actively traded June contract rose 75 cents, or 0.9%, to $86.16 at 1101 GMT. The May contract expires on Thursday.

U.S. West Texas Intermediate (WTI) crude futures for May delivery were up 89 cents, or 1.1%, to $82.24 a barrel.

Both benchmarks were on track to finish higher for a third consecutive month.

In the prior session, oil prices were pressured following last week’s unexpected rise in oil and gasoline inventories, driven by a rise in crude imports and sluggish gasoline demand, according to Energy Information Administration data.

However, the crude stock increase was smaller than the build projected by the American Petroleum Institute, and analysts pointed out that the increase was lower than what would be expected for this time of year.

“We … expect U.S. inventories to rise less than normal in reflection of a global oil market in a slight deficit,” SEB analyst Bjarne Schieldrop said. “This will likely hand support to the price going forward.”

Also providing support to prices were U.S. refinery utilisation rates, which rose 0.9 percentage points last week.

Recent disappointing inflation data affirms the case for the U.S. Federal Reserve to hold off on cutting its short-term interest rate target, a Fed governor said on Wednesday, but he did not rule out trimming rates later in the year.

“The market is converging on a June start to cuts for both the Fed and the European Central Bank,” JPMorgan analysts said in a note. Lower interest rates support oil demand.

Investors will watch for cues from a meeting next week of the Joint Monitoring Ministerial Committee of producer group the Organisation of Petroleum Exporting Countries (OPEC) amid supply concerns over geopolitical risks.

OPEC+ is unlikely to make any oil output policy changes until a full ministerial gathering in June.

© Reuters. An aerial view shows oil tanks of Transneft oil pipeline operator at the crude oil terminal Kozmino on the shore of Nakhodka Bay near the port city of Nakhodka, Russia June 13, 2022. Picture taken with a drone. REUTERS/Tatiana Meel

“[We] do not see any indications that the recent run-up in prices due to the heightened Russian infrastructure risk will prompt any policy reversal at next week’s JMMC meeting.” RBC analyst Helima Croft said.

“Any serious shift will likely have to wait until the June 1 ministerial meeting, and even then, we believe the group will be very judicious when it comes to unwinding any cuts.”

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Firmer oil prices expected as demand builds and supply curbs persist: Reuters poll

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By Sherin Elizabeth Varghese

(Reuters) – Oil prices will gain some momentum this year as demand picks up and output curbs by the OPEC+ producer group continue to squeeze supply that is already being pressured by military conflicts, a Reuters poll showed on Thursday.

A survey of 46 economists and analysts forecast that would average $82.33 a barrel in 2024, up from the $81.13 consensus projection in February. expectations were raised to $78.09, up from the $76.54 forecast last month.

This was the first upward revision in 2024 consensus forecasts since the October poll.

“We see the oil price rally going further until the summer months,” said Florian Grunberger, senior analyst at data and analytics firm Kpler. “This is due to the geopolitical risk premium and the interests of OPEC+ members, coupled with increasing demand in China.”

Oil prices have added more than 12% in the quarter so far, fuelled by geopolitical tensions in the Middle East, Houthi attacks on Red Sea shipping and recent Ukrainian drone attacks on Russian refineries. [O/R]

On the demand side, the overall consensus was roughly in line with the 1.3 million barrel per day (bpd) rise for 2024 projected by the International Energy Agency.

The IEA’s forecast was far less bullish than that of OPEC, which expects demand growth at 2.25 million bpd this year and said the 2024 and 2025 growth trajectories of India, China and the United States could exceed current expectations.

“Traders have now fully absorbed the implications of the OPEC+ supply cut extensions at a time when demand is proving more robust than expected,” said Matthew Sherwood, lead commodities analyst at the Economist Intelligence Unit.

© Reuters. FILE PHOTO: A person uses a fuel nozzle to fuel up a car at a petrol station in Vienna, Austria March 18, 2022. REUTERS/Leonhard Foeger/File Photo

OPEC+ members led by Saudi Arabia and Russia are unlikely to make any oil output policy changes until a full ministerial gathering in June, three OPEC+ sources told Reuters.

“Convincing OPEC+ members to under-produce as a group to maintain oil prices above a certain level is not going to be easy,” said Suvro Sarkar, energy sector team lead at DBS Bank, pointing to rising surplus capacity and the loss of OPEC+ market share to non-OPEC+ producers such as the United States.

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Analysis-Pasta makers cheer Turkey as its durum wheat flows abroad

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By Ceyda Caglayan and Gus Trompiz

ISTANBUL/PARIS (Reuters) – Turkey’s spectacular breakthrough as an exporter of durum wheat has spared pasta fans another year of price pain and the country is poised to remain a crucial source of the ingredient prized in Mediterranean cuisine.

On track to be the world’s second-largest durum exporter in 2023/24, Turkey has helped fill a supply gap caused by a second drought in three years in top supplier Canada and stifled a price surge seen at the season’s start.

Global stocks of durum are still forecast to hit a three-decade low this season, according to the International Grains Council, an intergovernmental body. But Turkish shipments have averted an immediate shortfall and kept durum in line with easing world prices of staple grains.

Previously a net importer of the hard wheat whose milled flour is used to make pasta, couscous and certain types of bread in the Mediterranean region, Turkey has taken the market by surprise by exporting around 1.5 million metric tons of durum so far in the 2023/24 season ending in June.

“Turkey, by entering global markets as an exporter, changed the game,” Aykut Goymen, chairman of Turkey’s pasta industry association, said.

“I can say that it was not a one-off thing and it is sustainable for Turkey to be a durum exporter in the coming years.”

Turkey’s better-than-anticipated crop last year left stocks brimming following hefty imports made in response to high inflation and earlier drought.

Attractive prices for farmers, including a near 30% rise in the state’s purchase price last year, as well as investment in irrigation, have boosted sowing and yields. Weakness in the lira during an economic crisis also made Turkish durum more competitive overseas.

With growers planting more and weather staying clement so far, Turkish production is widely expected to set a second straight record this year above 4 million tons.

That comfortably surpasses the country’s annual domestic consumption of up to 3 million tons. Demand from its large export-focused pasta industry has been curbed by a shift to using cheaper soft wheat for cost-conscious markets in Africa and Latin America.

Analysts anticipate another year of substantial exports, even if Canadian output recovers, with the 2024/25 volume seen potentially exceeding 1 million tons again.

Turkish shipments, along with sizeable flows from Russia and Kazakhstan, have been a boon for importers in Italy.

“Pasta producers bought durum from Turkey because it was offered to us at competitive prices,” said Vincenzo Divella, co-CEO of the eponymous Italian pasta company.

“We had a big problem in Canada … In our country, the season was disastrous because of the weather and rains.”

The Turkish crop is seen in Italy as a good-quality option, though Canadian durum remains the benchmark for many processors.

Lower durum prices, which have fallen by at least one-fifth to return to where they were before last summer’s panic over Canada’s drought, are bringing relief for shoppers. Retail pasta prices in Italy in the two months to Feb. 25 were down 3.5% year on year, compared with a 7.4% rise over 2023, market data specialist Nielsen said.

With Europe now planning to use tariffs to shut out grain from Russia, in further fallout from Moscow’s invasion of Ukraine, Turkish trade could become even more crucial.

“For durum, this could have major consequences, particularly for Italian imports,” Severine Omnes-Maisons, analyst at Strategie Grains, said of the proposed tariffs on Russia, which has supplied a fifth of EU durum imports so far in 2023/24.

Dwindling cultivation in the durum consumption heartlands of Europe and North Africa may also make the market more reliant on imported supply from Turkey.

Drought has gripped parts of the Maghreb and southern Europe in what analysts see as a sign that the zone is becoming too arid even for a crop that likes dry, warm conditions. Morocco’s cereal harvest is set to shrink by half this year.

In France, a regular supplier to EU neighbours, torrential rain could reduce this year’s durum area to a new 21st century low.

Importers have responded by scooping up crop from Turkey, Russia and Kazakhstan, a trio that Argus Media analyst Alexandre Marie sees as a potential “Canada on Europe’s doorstep”.

But some are cautious about Turkey’s long-term role given its state-managed grain supply and its own climate risks.

© Reuters. A person grates parmesan cheese over a plate of fettuccine with ragu at a restaurant in Rome, Italy, March 25, 2024. REUTERS/Remo Casilli

This season’s export campaign has been marked by uncertainty over how much exports the authorities will allow. State grain agency TMO this month cancelled an export tender.

“This season we were living day to day with Turkey. It remains a very political process,” one European durum trader said.

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