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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 — The news came as quietly as it could on a Friday afternoon and passed without any discernible impact. And understandably too: The U.S. went up by one last week, after a drop of 127 over the past year.

But there was a significance to the story. It was the first time since June that U.S. energy firms increased the number of rigs actively drilling for oil in the country, according to a weekly update of the rig count by oil services firm Baker Hughes.

One oil rig, of course, means nothing — particularly if the count drops back the following week, and by a far greater amount.

But it could mean something if there’s a steady climb hereon.

If not anything else, a steady, albeit slow, climb will challenge the argument made day in and out by those convinced that this year’s near-20% slump in rigs will soon cause a tumble in U.S. crude production.

That argument has grown despite the U.S. Energy Information Administration, or EIA, adjusting upward its estimate on crude production to three-year highs of 12.8 million barrels per day in recent weeks, from 12.2 million at the end of July.

The EIA’s revisions came after it raised its production for U.S. crude under a new reporting methodology that took into account crude flowing from active oil wells compared with those that are drilled but uncompleted — the latter referred to as DUCs.

The revisions imply that active drilling rigs were about 10% more productive in 2021–2022 than previously estimated. Such drilling-rig productivity or efficiency would offset to some extent this year’s sheer drop in the rig count.

The EIA’s new methodology is, however, vehemently opposed by those who are long-oil, or wagering for crude prices to rise.

“The reality is that the trajectory of future US oil production would beak and the supply side would start to drain and that is happening,” said Phil Flynn, an energy analyst at Chicago’s Price Futures Group, whose many followers are made up of those who are long oil.

The rig count remains one of the crucial indicators of oil production. But even so, it’s a lagging indicator that could take months to show up in actual production. This may be why the EIA’s crude production estimates haven’t ticked down yet as the falling rig count hasn’t made a commensurate impact on U.S. crude.

But then again, we have to consider the EIA’s explanation about the higher drilling efficiency for the remaining active wells, a phenomenon that could well challenge any argument about falling rigs.

There are many who contend that the EIA is going about the whole thing wrongly, and for devious reasons too, they say. Their theory is based on the conspiracy of an entire U.S. energy department working in cahoots with the White House to cook up numbers on drilling efficiency. The accusation does not seem to take into account career professionals at the department who’ve dedicated their lives working for the betterment of the energy sector and the data integrity that’s sacrosanct to their work.

But there are also economists like Adam Button, who while bullish on oil, are pragmatic about the lift current crude prices can provide to production.

“It’s tough to see how U.S. oil production is higher at the end of next year if this doesn’t turn around quickly,” Button said, referring to the oil rig count, in a blog on the ForexLive platform on Friday.

He, however, added: “There is plenty of talk about discipline among U.S. oil producers but $87 oil has a way of eroding that.”

The last line was in reference to the pre-weekend settlement for U.S. crude, which in March stood at a low of beneath $65.

Oil: Market Settlements and Activity

Oil prices rose for a second week in a row on Friday as traders hedged against supply insecurities, ramped up by concerns that Saudi Arabia and Russia will be removing a combined 1.3 million barrels per day from the market till the year-end.

Both New York-traded WTI, or West Texas Intermediate, crude and its London-based peer, Brent, reversed Thursday’s drop of close to 1% as the weekend approached.

did a final trade of $87.23 on Friday after officially settling the session at $87.51 per barrel, up 64 cents, or 0.7%, on the day. The U.S. crude benchmark hit a 10-month peak of $88.09 on Wednesday. With a net gain in three days versus two, WTI rose 2.2% on the week, extending the prior week’s 7.2% rally.

did a final trade of $90.44 on Friday after officially settling the session at $90.65, up 73 cents, or 0.8%, on the day, recapturing the $90 handle which it momentarily lost for the first time on Thursday after gaining it on Tuesday. For the week, the global oil benchmark rose 2.4%, extending the prior week’s 4.8% gain.

Brent’s rise to above $90 came with less than three weeks left of summer, the season Americans like driving the most. With the fall season of lower oil usage set to begin on Sept. 23, crude prices would typically retreat a little, sometimes meaningfully, in the world’s largest consuming country.

But that may not happen this time, not with Saudi Arabia’s target of ultimately getting oil to $100 a barrel or beyond. The Saudis, who control much of the world’s oil exports, have been trying to bring oil back to triple-digit pricing since losing that advantage in August 2022, when Brent crude hovered above $105 a barrel.

Key to this is the 1 million barrels per day in additional cuts, on top of other existing production rationing, that the Saudis have been carrying out since July. By extending this till the year-end — and widening it with the help of Moscow which will cut 300,000 barrels per day of Russian production — the kingdom is hoping to create a different sort of market phenomenon for pricing.

Fear of less oil for the market to play with was playing on traders’ minds, particularly with the approach of the weekend which tends to put the market on a hedging overdrive, said analysts.

“Oil prices have consolidated a little as we’ve moved through the week but the trend remains very positive for crude, backed once again by the decision from Saudi Arabia and Russia to extend supply restrictions to the end of the year,” observed Craig Erlam, analyst at online trading platform OANDA.

“A lot more oil [is] off the market at a time when it’s clearly quite tight, albeit with a global economic outlook that is highly uncertain. Demand may still wane but traders appear to be working on the assumption of soft landings and mild recessions at worst. China is another unknown with slow and steady growth, by its standards, looking like the path ahead.”

Data on Thursday showed overall Chinese exports and imports fell in August, as sagging overseas demand and weak consumer spending squeezed businesses.

However, even in times of lackluster economic activity, China tends to bolster its storage capacity, particularly with the availability of cheap Russian crude. Last month, Chinese crude imports rose nearly 31%.

Meanwhile, questions remain about whether central banks in the United States and Europe will continue their aggressive interest rate hike campaigns to tame persistent inflation.

The Saudis are “acutely aware of the tightrope” which they walk between tight supplies and the limited progress in fighting achieved by central banks, said John Evans at oil broker PVM.

Oil: WTI Technical Outlook

WTI’s close of above the 100-week SMA, or Simple Moving Average, statically aligns with the $85.90 support, adding more fuel to its bullish bias, said Sunil Kumar Dixit, technical strategist at SKCharting.com.

As long as the momentum in the U.S. crude benchmark maintains stability at above the 5-day EMA, or Exponential Moving Average dynamically positioned at $86.60, “oil bears will have to remain in the waiting lounge”, Dixit remarked.

He, however, cautions that the ride up will probably be smaller after this.

“It should be noted that the aforementioned 5-day EMA is the first line of defense for the longs,” Dixit said. “There is limited room for immediate upward advance towards the initial resistance of $88.50 and $89.50, before WTI’s embarkation towards major overhead resistance at $96.”

Weakness in chasing the heights can be witnessed if $89.50 proves to be a resistance as well, which may gain affirmation with a close below the 5-day EMA, said Dixit.

“Such downward consolidation below the 5-Day EMA will aim for a drop towards the horizontal support of $84.90 – $84.40,” he said. “If this support area fails, we can expect a drop to $83.70 and $82.80.”

Gold: Market Settlements and Activity

The prospect of gold breaking out solely on a Fed pause in rates was challenged again this week as the yellow metal posted a weekly loss as its nemesis, the , shot up instead.

In Friday’s trade, gold futures’ most-active did a final trade of $1,942.60 an ounce, after officially settling the session at $1,942.70, up 20 cents on the day. Yet, losses in three prior sessions after Monday’s U.S. Labor Day holiday meant a negative week for gold futures, which finished the five-day period down by a net 1.2%, practically giving back the previous week’s 1.3% gain.

The , which is more closely followed than futures by some traders, settled at $1,919.15, down 57 cents, or 0.03%. For the week, the spot price, which is reflective of real-time trades in bullion, was down 1.1% versus the prior week’s 1.3% gain.

The previous week’s gain came on the back of the U.S. report for August, which saw unemployment tick up to 3.8% from July’s 3.5% despite a gain of 187,000 jobs versus the forecast 170,000. The higher jobless rate reinforced the notion that the Fed will hold rates unchanged when it meets on Sept. 20 to review U.S. monetary policy, sending gold momentarily higher last week.

But as this week began, speculation resurfaced of the Fed exercising another rate hike or more before the end of the year, in its bid to bring inflation to its annual target of 2%.

Inflation, measured by the , or CPI, fell from a four-decade high of more than 9% per annum in June 2022 to as low as 3% in June this year. But as of July, it began to perk again, reaching 3.2%. That raised the possibility of the Fed, which has already added 5% to interest rates over the past 18 months, to turn aggressive again on monetary policy. That sent the Dollar Index to six-month highs.

Since the latest non-farm payrolls surfaced a week ago, the spot price of gold has moved just about $15 an ounce, going from a settlement of just below $1,940 on Sept. 1 to trade in a range of between $1,920 and $1,925 in the latest session.

Gold chartist Sunil Kumar Dixit said the same $15 play is what the spot price needs to crack in order for a new price direction to emerge.

Paramount to the bears in gold now is a push of the spot price beneath the key $1,1915 support, said Dixit.

For the longs, it’s a clear break above the $1,930 resistance, he said.

“Gold has had another interesting week, with last Friday’s jobs report feeling like a distant memory,” said Ed Moya, analyst at online trading platform OANDA. “It didn’t give it anything like the boost that it appeared it would on the basis of the numbers themselves, almost all of which looked very favorable.”

Moya noted that gold’s slide this week also came on the back of U.S. economic data suggesting that a soft landing, rather than a hard recession, could be the scenario for the world’s largest economy by the end of the year.

“Perhaps the yellow metal has found steady ground in the $1,900-$1,950 region as we await next week’s inflation data and the Fed meeting the following week,” he said, referring to the upcoming August update of the CPI and the of the central bank.

Gold: Spot Price Outlook

Spot gold’s bounce back from the $1,915 confluence support zone, marked by the Daily Middle Bollinger and the 200-day SMA, met with resistance at the 50-day EMA of $1,930, resulting in a drop to $1,917, SKCharting’s Dixit noted.

“The bulls have however a ray of hope with settlement above the mentioned inflection point for resuming an upward advance to retest $1,930,” said Dixit. “Clearing through this zone will put spot gold back on the bullish path for $1,940-$1,948.”

Strong acceptance above $1,948 will also favor the next leg higher at $1,971-$1,975, he said.

“If this support cluster fails to hold, we are likely to see gold dropping to $1,910, followed by the 50-week EMA of $1,899. A break below $1,899 opens the way for deeper losses.”

Major downside support was seen at the monthly Middle Bollinger Band of $1,858, he added.

Natural gas: Market Settlements and Activity

The front-month on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.618 per mmBtu, or million metric British thermal units on Friday after officially settling the session at $2.605, up 2.6 cents or 1%.

For the week though, October gas fell 16 cents, or 5.8%.

Natural gas: Technical Outlook

Natural Gas continues to coil within a narrowing range of the 100-day SMA of $2.51 which acts as horizontal support and the $2.70 level, which serves as resistance, said SKCharting’s Dixit.

“The market appears to be waiting for a break above the descending 200-day SMA of $2.90,” Dixit said. “Above $2.90 and $3.00, the next resistance levels would be $3.17 and $3.24.”

But a break below $2.50 will turn the short-term trend in gas back towards bearish, with a downside potential retest at $2.25 and $2.00, he said.

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

Commodities

Oil prices settle higher, but fall to heavy weekly losses on rate, demand jitters

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Investing.com– Oil prices settled higher Friday, but that did little to prevent heavy weekly losses Friday as concerns over sticky inflation and high interest rates spurred doubts that demand will remain robust this year. 

At 14:30ET (18:30 GMT), rose 1% to $82.14 a barrel, but posted losses of about 2% for the week. While rose 1.1% to $77.74 a barrel, but still slipped to a more than 2% loss for the week. 

Oil heads for weekly losses as rate jitters weigh 

Both contracts were set to lose around 4% this week, with Brent at its weakest level in two months and WTI at a three-month low. Pressure has come chiefly from concerns over sticky U.S. inflation and the potential for interest rates remaining elevated for a long time.

A string of signals from the Federal Reserve reflected increased anxiety among policymakers that inflation will be slow in reaching the central bank’s 2% annual target – a scenario that is expected to push the central bank into keeping rates high.

Analysts at Goldman Sachs have pushed back when they expect the Federal Reserve to cut interest rates this year, citing comments from central bank officials this week calling for more evidence that inflation in the world’s largest economy is sustainably cooling down to their 2% target.

In a note to clients on Friday, Goldman Sachs analysts said they now do not expect the Fed to roll out a rate cut until September. They had previously estimated that the reduction — which would be the first since the Fed embarked on a steep run of policy tightening in 2022 — would come in July.

The tool now shows a nearly equal probability of a cut or a hold in September.

Baker Hughes rig unchanged

Oilfield services firm Baker Hughes reported Friday its weekly U.S. rigs were unchanged at 497. The ongoing lull in drilling activity hasn’t done much to dent domestic output, which remains near record highs at 13.1 million barrels per day. That is above the average of 12.936 million barrels a day seen last year. 

In a trend that has stoked fears of non-OPOC-led oversupply, the U.S. has led global oil production for six years in a row. OPEC and its allies, OPEC+, have attempted to curb global supply through a agreements that seek to limit output of member countries. 

OPEC+ meeting in focus for more supply cues 

Markets were now looking to a meeting of the Organization of Petroleum Exporting Countries and allies (OPEC+), which is set for the start of June. 

Focus will be largely on whether the cartel will extend voluntary production cuts totalling about 2.2 million barrels per day past an end-June deadline.

These voluntary cuts from the cartel of major producers come on top of earlier reductions of 3.66 million barrels per day that were announced in various steps since late 2022 and which are valid until the end of 2024.

Total pledged cuts therefore currently amount to 5.86 million barrels per day, equal to about 5.7% of daily world demand.

But just how tight markets will be this year remains uncertain, especially as production remained at record highs. 

Some easing tensions in the Middle East also pointed to fewer supply disruptions for crude, while U.S. oil demand is expected to pick up in the coming weeks with the travel-heavy summer season. The Memorial Day weekend holiday usually marks the beginning of the season, with gasoline demand already seen picking up in the world’s biggest fuel consumer. 

(Peter Nurse, Ambar Warrick contributed to this article.)

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Oil posts weekly loss as interest rate policy spurs fuel demand worries

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By Arathy Somasekhar

HOUSTON (Reuters) -Oil prices rose about 1% on Friday, but fell for the week on worries that strong U.S. economic data would keep interest rates elevated for a longer period, curbing fuel demand.

The July contract rose 76 cents to $82.12 a barrel. The more-active August contract closed up 73 cents at $81.84.

U.S. West Texas Intermediate (WTI) crude futures settled 85 cents, or 1.1%, higher to $77.72.

On Thursday, Brent closed at its weakest since Feb. 7 and U.S. WTI futures at their lowest since Feb. 23.

Summer demand in the United States is expected to pick up starting this weekend, and some investors are wondering if the selloff was exaggerated, said Dennis Kissler, senior vice president of trading at BOK Financial.

Brent closed down 2.1% for the week. It declined for four straight sessions this week, its longest losing streak since Jan 2. WTI settled down 2.8% for the week.

Worries over Federal Reserve interest rate policy and last week’s bump in US crude oil inventories weighed on market sentiment, said Tim Evans, an independent energy analyst.

Minutes of the Fed’s latest policy meeting released on Wednesday showed policymakers questioning whether interest rates were high enough to tame stubborn inflation. Some officials were willing to raise borrowing costs again if inflation surged.

Fed Chair Jerome Powell and other policymakers have since said they feel further increases are unlikely.

Higher interest rates increase the cost of borrowing, which can slow economic activity and dampen demand for oil.

Consumer sentiment also fell to a five-month low on mounting fears about borrowing costs staying high. At face value, pessimism among households would imply slower consumer spending, though the relationship between the two has been weak.

Oil demand is still robust from a broader perspective, analysts at Morgan Stanley wrote in a note, adding they expect total oil liquids consumption to increase by about 1.5 million barrels per day this year.

Soft U.S. gasoline demand has been offset by global demand, which surprised to the upside, especially in the early parts of the year, the analysts said.

U.S. gasoline product supplied, a proxy for demand, reached its highest level since November in the week to May 17, the Energy Information Administration (EIA) said on Wednesday.

On the supply side, the oil rig count, an early indicator of future output, was unchanged at 497 this week, energy services firm Baker Hughes said.

Meanwhile, the market is awaiting a June 2 online meeting of the OPEC+ producer group comprising the Organization of the Petroleum Exporting Countries and its allies to discuss whether to extend voluntary oil output cuts of 2.2 million barrels per day.

Analysts largely anticipate that current production cuts will be extended at least to the end of September.

Russia, in a rare admission of oil overproduction, said this week it exceeded its OPEC+ production quota in April for “technical reasons,” a surprise that analysts and industry sources say shows Moscow’s challenges in curbing output.

© Reuters. FILE PHOTO: A tug boat pushes an oil barge through New York Harbor in New York City, U.S., May 24, 2022.  REUTERS/Brendan McDermid/File Photo

Venezuela aims to produce 1.23 million barrels per day (bpd) of oil in December, adding about 290,000 bpd compared to the start of the year, following the addition of drilling rigs, oil minister Pedro Tellechea said.

Money managers raised their net long futures and options positions in the week to May 21, the U.S. Commodity Futures Trading Commission (CFTC) said on Friday.

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Commodities

Morning bid: Fed fears overwhelm AI theme, gold recoils

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A look at the day ahead in U.S. and global markets from Mike Dolan

And then there was one.

In an extraordinary turnabout in just five months, financial markets now fully price just one quarter-point interest rate cut from the Federal Reserve this year – compared to the six built into futures prices at the start of 2024.

The good news is that’s largely down to the sheer strength of the ongoing U.S. expansion – the bad news is that very strength makes it harder for the Fed to see inflation hitting its target and keeps it hesitating on a first rate cut.

Thursday’s reversal of fortunes on Wall St reflected all that clearly, with surprisingly strong business and labor market updates seeding the worst day of the month for despite Nvidia (NASDAQ:)’s near 10% surge on another blowout earnings report infused by the artificial intelligence boom.

Even though the broader tech sector ended the day higher, the 10 other major stock sectors were left in the red. And the equal-weighted S&P500 lost 1.4%.

Fed fears 1 – AI 0.

With just 35 basis points of Fed easing now priced for the year, two-year Treasury yields climbed back to within 4bps of the 5% threshold. The dollar jumped back to its best level since mid May and that in turn triggered a reversal in lofty gold prices – clocking their worst day in month and worst week of the year.

The bounced back more than a point from pre-pandemic lows.

A so-called “bear-flattening” of the yield curve saw the inversion of the 2-10 year yield gap deepen to its most negative this year – with yields at both tenures rising but short rates up by more.

The yield curve has been inverted for almost two years solid now and its reliability as a harbinger of recession has been shot to bits – underscoring the peculiarity of this particular cycle and how the Fed may be struggling to cool it down.

Ahead of the U.S. Memorial Day holiday on Monday, all the major price indicators have given back a bit of Thursday’s moves – with up 0.2% ahead of the bell and both Treasury yields and the dollar off a touch.

But the Fed rate jitters rippled across the world overnight, with bourses in Tokyo, Seoul, Hong Kong and Shanghai losing more than 1% on Friday.

China’s ongoing military exercises around Taiwan have not helped investor confidence.

Europe’s two-day loss continued – with regional interest rate and political concerns of its own.

Even though the European Central Bank is still nailed on to deliver its first rate cut next month, unexpected strength in May business readings and a surprising acceleration of negotiated wage settlements in the first quarter have dragged market pricing for full-year ECB easing back below 60bp.

The rethink of the Bank of England’s trajectory this week has been even more dramatic as sticky UK inflation readings combined with news of a snap election for July 4.

Although Friday’s data showed UK retail sales plunging far more than forecast last month, money markets have wiped out chances of a BoE cut next month and now only see a 1-in-3 chance of a move in August.

Sterling, whose broader trade-weighted index is back up at 8-year highs to pre-Brexit referendum levels, recaptured some of Thursday’s losses against the dollar.

Elsewhere, traders monitored the G7 finance meeting in Italy and a Friday speech from Fed governor Chris Waller in Iceland.

In company news, a 7.55% tumble in Boeing (NYSE:) on Thursday after the U.S. planemaker forecast negative free cash flow in 2024 accounted for over 90 points to the downside for the blue-chip .

Ticketmaster-owner Live Nation slumped almost 8% after the U.S. Justice Department along with a group of 30 states and the District of Columbia Thursday sued to break up the concert promoter.

In Europe on Friday, shares of Renault (EPA:) rose 4% after the French carmaker announced a share buyback plan. And Britain’s National Grid (LON:) regained nearly all of Thursday’s 10% plunge on plans to raise about 7 billion pounds ($8.9 billion) in a rights issue.

Abrdn shares slipped after the UK fund manager’s CEO Stephen Bird stepped down.

Key diary items that may provide direction to U.S. markets later on Friday:

* U.S. April durable goods orders, University of Michigan’s final May household survey reading

* G7 finance ministers and central bank Governors meet in Stresa, Italy

© Reuters. AI (Artificial Intelligence) letters and robot hand are placed on computer motherboard in this illustration taken, June 23, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

* Federal Reserve Board Governor Christopher Waller speaks

* U.S. corporate earnings: Workday (NASDAQ:)

(By Mike Dolan, editing by Nick Macfie mike.dolan@thomsonreuters.com)

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