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Energy & Precious Metals – Weekly Review and Calendar Ahead

By Barani Krishnan

Investing.com - Easy does it, oil bull. Or, for that matter, bear.

Opening the week 1% down, U.S. crude futures launched into a bit of a phenomenon unseen lately -- three straight days of gains of about 2% or more. Then, with the weekend looming, the market behaved more like it has in recent times -- plunging almost 3%. The end result: an almost 2% gain on the week and a 6% drop on the month, the worst monthly performance since May.

Volatility is here to stay in oil. And it could get worse as prices get sent in all directions from startlingly contrasting drivers that include epic U.S. crude stockpile draws to suggestions of improvement in U.S.-China ties and Russia’s admission that it was betraying OPEC cuts. Add to this an Iranian oil tanker on the run with 2 million barrels, and constantly manipulating its tracking information to fool the Trump administration, and the story in oil gets beyond tense to comedic.

But back to the market swings. While these gyrations that are making new waves on the CBOE Crude Oil Volatility Index may be great for the so-called vol-player, they can also crush the day trader moving nimbly along with small margins. Hence, the need for caution, regardless of position.

And crude could experience quicker twists and turns in the holiday-shortened week ahead, which begins with Monday’s U.S. Labor Day that unofficially marks the end of the nation’s peak summer driving period and closes with Friday’s release of U.S. jobs numbers for August.

But it could be a different story in gold, which thrives on bad news. And there’s plenty of scope for disappointing news ahead, from the ongoing trade war to potential for dismal Euopean manufacturing or retail sales data. That’s not yet taking into account new U.S. tariffs on China that come into force from today, Sept 1: 91.6% of apparel, 68.4% of home textiles and 52.5% of footwear imports will be hit with a 15% tariff.

For the record, gold rose to a new six-year high this week although it fell in three consecutive sessions.

Energy Review

Russian Oil Minister Alexander Novak admitted on Friday that Moscow's production cuts won’t meet what it promised the Organization of the Petroleum Exporting Countries, dropping a bombshell that practically nuked this week’s rally in oil.

Until Novak’s revelation, both New York-traded West Texas Intermediate crude and Brent, the global benchmark for oil outside of the U.S., had been humming along with an impressive daily gain of about 2% or more, helped by a massive 10-million barrels plus weekly drawdown in U.S. crude and talk that U.S.-China trade sentiment could be turning for the better.

To make matters worse, the Russian admission of guilt came as a Reuters survey showed that OPEC oil output increased in August for the first time in 2019. That survey, however, only cited higher supply from Iraq and Nigeria, since Russia remains a mere ally of OPEC, not member. OPEC pumped 29.61 million bpd this month, an increase of 80,000 bpd from July, according to the survey.

With Monday’s Labor Day holiday, the much-touted peak summer demand period for oil will draw to a close, ostensibly paving the way for smaller weekly drawdowns in U.S. crude as the fall season beckons. The question though is how quickly this transition will occur. While oil bears will be hoping for draws to practically fall off the cliff from the first week of September, historical data suggests that strong demand could hold up for a few more weeks at least.

Last year, during the penultimate week of August, the U.S. Energy Information Administration reported a crude drawdown of 5.8 million barrels. In the following four weeks, U.S. crude stockpiles continued to see declines, losing a cumulative 14.2 million barrels.

In 2017, U.S. crude draws abruptly stopped in the final week of August before three straight weeks of builds that added nearly 15 million barrels to inventories. But almost all of that was cleared in the successive four weeks, as stockpiles dropped without pause.

The caveat to such a trend this time is, of course, unyielding U.S. crude production. According to the EIA, U.S. crude output hit another record high of 12.5 million barrels per day last week. But U.S. crude exports have also been strong for months in a row, often staying above 2.5 million bpd and reaching 3.0 million last week. And U.S. crude is also being tried out as a substitute for Iranian oil in South Korea, Reuters reported this week.

WTI is up 21% on the year. But at Friday’s settlement of $55.10 per barrel, it is also down about 20% from its April peak of $66.60.

In the final submission, U.S. oil demand will be measured up against global recession fears and the trade war, which will intensify with the Sept. 1 tariffs. All things being equal, the slowdown fears have won so far.

Energy Calendar Ahead

Monday, Sept 2

U.S. Labor Day Holiday

Tuesday, Sept 3

Genscape Cushing crude stockpile estimates (private data)

Wednesday, Sept 4

American Petroleum Institute weekly report on oil stockpiles.

Thursday, Sept 5

EIA weekly report on oil stockpiles

EIA weekly natural gas report

Friday, Sept 6

Baker Hughes weekly rig count.

Precious Metals Review

U.S. gold futures rose 6.4% in August. While that fell short of June’s 7.8% jump, it an incredible finish, nevertheless, for longs in the precious metal as the U.S. and China escalated their tariff war throughout August. Only in the final week did the tit-for-tat retaliation and rhetoric on both sides dry up. Chinese officials said on Friday negotiators on both sides were “maintaining effective communication”, even as the Trump administration prepared to pile new tariffs on Chinese imports come Sunday.

Gold also hit a six-year high of $1,564.95 this week and is less than $350 from making a new record high that will smash its 2011 peak of $1,911.60. While there’s no certainty that it will attain an all-time high before the year is out, the trade war and a host of other tensions, primarily the U.S.-Iran conflict, are keeping alive gold bugs’ hopes for a major payday in 2019. The yellow metal is up 16.5% on the year.

Markets are, meanwhile, continuing to price in an additional 25 basis point cut in rates at the U.S. Federal Reserve’s next policy decision, slated for Sept 17-18. Lower interest rates tend to support gold by reducing the yield on bonds, which compete for the capital of risk-averse investors.

Minneapolis Fed president Neel Kashkari, New York Fed President John Williams and Chicago Fed President Evans speak at events on Wednesday that could shed light on the central bank’s direction for rates.

Precious Metals Calendar Ahead

Monday, Sept 2

US Labor Day Holiday

Eurozone Manufacturing PMI (Aug)

Eurozone PPI (July)

Tuesday, Sept 3

US ISM Manufacturing PMI (Aug)

Wednesday, Sept 4

US FOMC Member Rosengren Speaks

Eurozone Markit Composite Index

Eurozone Retail Sales

US Trade Balance (July)

US FOMC Member Williams Speaks

US FOMC Member Kashkari Speaks

US Chicago Fed President Evans Speaks

Thursday, Sept 5

US Jobless Claims 4-Week Avg

US ISM Non-Manufacturing PMI (Aug)

US Durable Goods Orders (MoM)

US Factory Goods Orders (July)

Friday, Sept 6

US Non-farm payrolls (Aug)

Eurozone Employment Overall (Q2)

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