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Energy & Precious Metals - Weekly Review and Calendar Ahead

By Barani Krishnan

Investing.com - The White House seems to have the last word on oil now.

Commerce Secretary Wilbur Ross sent crude prices rallying at the end of the week by telling Fox Business there was a very high probability the White House will reach final agreement with China on their phase one trade deal. “We’re down to the last details,” Ross said, adding that a phone call Friday will discuss further.

For a market initially poised to close the week down - or flat at most - oil ended up about 1% or more on Ross’ exceedingly optimistic outlook for a U.S.-China trade resolution. The commerce secretary, along with his White House colleague Larry Kudrow, whose job is to advise President Donald Trump on the economy, also helped send all three major stock indices on Wall Street to record high closings on Friday.

Not surprisingly, gold, the contrarian bet to the U.S.-China optimism, fell as the we’re-closing-in-on-a-deal speculation knocked prices of bullion and COMEX futures lower. Still, it was a dip, not tumble, proving that at least the safe-haven crowd is hedging for the possibility for that not all that glitters is a trade deal.

Energy Review

What specifically a trade deal will do for oil is anyone’s guess.

In the meanwhile, signs of rising supplies are what the market needs to focus on.

Among them are weekly crude stockpiles reported by the Energy Information Administration, which came in a third higher than market expectations. The same EIA report issued Thursday cited a weekly gasoline build of nearly 2 million barrels, versus the drop of slightly more than one million forecast by the market.

If that wasn’t enough, the EIA’s Short-Term Energy Outlook published on Wednesday said U.S. crude oil output is expected to have hit a record of 13 million barrels per day this month and will grow more than expected in 2019 and 2020. The weekly report on Thursday estimated that production was already at 12.8 million bpd.

Casting a further pall on the market, the International Energy Agency also said in its monthly report on Friday that OPEC and its allies face stiffening competition in 2020.

The Paris-based IEA estimated non-OPEC supply growth would surge to 2.3 million barrels per day (bpd) next year compared to 1.8 million bpd in 2019, citing production from the United States, Brazil, Norway and Guyana.

Oil traders instead went with OPEC’s suggestion that U.S. shale oil production might be collapsing.

OPEC Secretary-General Barkindo told CNBC that after talking to “a number of producers, especially in the shale basin, there is a growing concern by themselves that the slowdown is almost graduating into a fast deceleration.” Barkindo added that these companies “are telling us that we are probably more optimistic than they are considering the variety of headwind challenges they are facing.”

In reality, what OPEC needs to address is the persistent overproduction by serial offenders such as Nigeria and Iraq — even non-member ally Russia — that make it a challenge for the cartel’s de-facto leader Saudi Arabia to stick to the 1.2 million barrels per day of cuts agreed nearly a year ago. With the mega stock sale of Aramco, the Saudi state oil company, just around the corner, the kingdom prefers to enforce the existing production pact and somehow keep prices up, without getting into deeper cuts.

OPEC knows that when it meets in December, there very likely won’t be a decision for deeper cuts. But if that becomes a mantra now, it could pressure prices lower, especially with the absence of a U.S.-China deal. So OPEC talks down shale, and the market buys that.

To be fair, not all the data in oil lately has been bearish.

Reuters, for instance, acknowledged some of Barkindo’s contentions about shale by reporting on Friday that the U.S. oil drillers plan another spending freeze next year.

A sharp slowdown in production growth, as prolific oil and natural gas output has pressured prices and squeezed profits, the Reuters report said.

Producers have already said they expect to spend about $4 billion less in 2019 than in 2018, according to data from U.S. financial services firm Cowen&Co quoted by Reuters. So far, 21 exploration and production companies tracked by Cowen have released 2020 capex guidance with 15 projecting declines, five with increases and one unchanged, for a 13% year-over-year spending decline.

Yet, Investing.com oil columnist Ellen R. Wald wrote on Thursday that traders needed to beware that shale oil companies were sometimes overly dramatic in expressing their growth concerns.

“These could be tactics designed to reduce analysts’ expectations, so when these companies reveal their Q4 earnings, their share prices won’t drop nearly as much,” Wald wrote.

So back to the US-China deal: Can what it really do for oil?

There is the presumption that China will be importing a lot more U.S. crude. Whether that’s true will be determined by how competitive U.S. light crude is against Arab Light, which remains China’s top choice now. Also, regardless of U.S. sanctions, Beijing might not entirely stop buying Iranian crude. All these reinforce the fact that demand for U.S. crude will not necessarily be stratospheric simply because a deal with China has been inked.

In the absence of that deal, we can presume that Ross and Kudrow will continue their weekly appearances on Fox to keep alive the hype of an imminent agreement. This will likely extend till the eve of Dec 15 — the deadline for more tariffs on China threatened by the Trump.

At that point, there could be another deferment to the scheduled tariffs.

And more talks.

Energy Calendar Ahead

Monday, Nov 18

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Nov 19

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Nov 20

EIA weekly report on oil stockpiles

Thursday, Nov 21

EIA weekly natural gas report

Friday, Nov 22

Baker Hughes weekly rig count.

Precious Metals Review

Despite the broad appetite for risk, gold’s downside was still limited Friday by some investors’ thinking that the trade deal might be some way off.

Chinese media, on Friday fleshed out arguments that Chinese demand for U.S. farm products is nowhere near the level of purchases that Washington is insisting on in order to seal a partial 'phase-1' deal.

“For investors, the impetus to buy gold as opposed to stocks is increasingly hard to justify with US equities printing new all-time highs, making loss-aversion a tough sell,” analysts at TD Securities said in a note.

“But as yields have also begun to creep lower — holding onto the downtrend formed by the end of the hiking cycle — precious metals prices have remained resilient, despite being at a risky juncture with the Fed now on pause.”

Gold futures for December delivery on New York’s COMEX settled at $1,468.50 per ounce, down 0.3% on the day but up 0.4% on the week.

Spot gold, which tracks live trades in bullion, saw a final trade of $1,467.86 in New York on Friday, down 0.1% on the day but up 0.6% on the week.

Gold fell off the bullish $1,500 perch early this month after Federal Reserve Chair Jay Powell suggested that the U.S. central bank’s third straight rate cut of a quarter point in October would be its last for the year.

TD Securities said while gold funds may have liquidated some of their long holdings in the yellow metal, “the bar is high for machines to add further selling pressure, and aggregate open interest still sits at all time highs.”

“Our estimated breakeven entry point for the bulls stands in the $1440/oz range, which suggests that a break below that range would be required for prices to be dragged lower by a decline in open interest. We contend that the pain trade is still to the downside in the near-term.”

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