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Energy & Precious Metals - Weekly Review and Calendar Ahead

By Barani Krishnan

Investing.com - How much worse could it get for oil?

Crude prices took their cue from a nosediving stock market to lose up to 16% this week for the biggest weekly tumble since the Great Recession that began in 2008. That’s a known.

But pundits looking at the carnage across markets from the coronavirus epidemic are warning that it could get a lot worse for oil and other risky assets before it gets better.

So, will crude prices drop to $40 a barrel? $30? Or even lower?

With the first death of an American from the coronavirus expected to weigh further on U.S. markets next week - amid reports of Russia still being undecided on the production cuts required by OPEC+ - it’s hard to imagine the selloff in oil is over.

Yet, oil bears may benefit from some immediate caution. While oil is down 25% on the year, two-thirds of the selloff happened in just over the last five days. The intensity of the plunge suggests that some buyback - if not at least a slowing in the decline - may happen.

If not for a technical rebound from oversold conditions, crude prices could still see some support in the coming week from the oil blockade in Iraq and potentially another positive dataset from the U.S. Energy Information Administration.

There could be OPEC jawboning too. With the cartel will be having its much-awaited meeting next week, it would be remiss for Saudi Arabia and other OPEC members not to talk up the market — regardless how much of a cut they ultimately agree with top ally Russia. As Herman Wang and Andrew Critchlow of energy media service Platts cautioned last week, “failure to reach an accord could put the entire OPEC+ pact at risk”.

The EIA will issue its weekly supply-demand report on Wednesday. OPEC holds its members-only meeting on Thursday and talks with Russia and other allies on Friday. That’s three back-to-back days of potentially positive data and soundbites that could add $1-$2 per barrel, maybe more.

Another major development that could provide a fillip to prices was Friday’s late announcement by Federal Reserve Chair Jay Powell that the central bank was monitoring risks to the United States from the coronavirus, and will use “appropriate tools” to support the economy — the clearest sign yet that rate cuts were coming.

The Fed’s last easing cycle ended in December after three months of back-to-back cuts of a quarter point each.

Bank of America says it expects a half point cut at the Fed’s next meeting on March 17-18. Goldman Sachs sees at least two more cuts after that through June.

Despite such positives, there’s still a possibility that coronavirus fears could prove to be the greater factor next week, especially if there's a spike in U.S. infections or fatalities. Then Wall Street could plumb to further depths seen during the financial crisis. At that point, the valid question to ask is how much more could oil lose?

Having set a $43.85 low on WTI this week, oil bears’ next target for the U.S. crude benchmark would be beneath the December 2018 bottom of $42.36. At Friday’s settlement of $44.76, we could be looking at a loss of more $2 per barrel.

For Brent, which sunk to $48.95, the new low to beat would be the Christmas Eve 2018 bottom of $49.93. Given Friday’s close of $49.67, the global crude benchmark would need to lose just over $1 to get to a new low, though there’s no telling how much it could really sink if it crosses that threshold.

In gold’s case, the expectation is everyone’s favorite safe-haven will behave as expected in the coming week to provide the hedge investors seek from the effects of the pandemic.

With world markets crashing and burning on Friday, gold was the one asset that was supposed to protect investors but failed them too.

Futures of gold and spot prices of bullion fell unexpectedly by more than 3% each as hedge funds cashed out earlier gains in the yellow metal to cover losses elsewhere.

Higher margin calls imposed on gold trades also shook some longs out of the market.

From a high of nearly $1,700 per ounce at the start of the week, gold finished at below $1,560. A rebound in the coming week could return it to above $1,600.

Energy Review

West Texas Intermediate, the U.S. crude benchmark, settled down $2.33, or 5%, at $44.76 per barrel, the lowest since December 2018. On a weekly basis, WTI lost 16%, its most in a week since December 14, 2008 — the era that spawned the Great Recession.

Brent, the London-traded global benchmark for crude, settled down 2.51, or 4.8%, at $49.67 per barrel, breaking the key $50 support. Brent’s session low of $48.95 was a bottom going back to July 2017. For the week, Brent was down 15%.

Crude prices plunged as stocks on Wall Street succumbed to a freefall. The S&P 500 was down 13% on the week, heading for its worst weekly slump since October 2008. In precious metals, gold tumbled 3.5% after higher margin calls imposed on gold traders and selling by hedge funds to cover losses elsewhere.

It said it expected the U.S. economy to grow by an annualized rate of 1.3% in the first quarter, down by 0.6% point because of the coronavirus. Growth for all of 2020 was seen at 1.7%, down 0.2%.

Crude traders now await to see if the OPEC+ alliance of oil producers — led by Saudi Arabia and Russia - could agree by next week to cut more than one million barrels per day from global production to stop the market’s bleeding.

Energy Calendar Ahead

Monday, March 2

Private Genscape data on Cushing oil inventory estimates

Tuesday, March 3

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, March 4

EIA weekly report on oil stockpiles

Thursday, March 5

EIA weekly natural gas report

OPEC Meeting

Friday, March 6

Baker Hughes weekly rig count.

OPEC+ Meeting

Precious Metals Review

Gold futures for April delivery on New York’s COMEX settled down $55.35, or 3.3%, at $1,587 per ounce, falling off the key $1,600 berth. The last time benchmark gold futures lost more in a day was in February 2018, when it slumped 4.6%. For the week in review, the contract lost 3.7%. But for the month, it managed to stay flat.

Spot gold, which tracks live trades in bullion, was at $1,586.16, down about 3.5% or more on both the day and week and about 0.3% lower on the month.

Gold was a safe-haven most investors piled into over the past month as tremors over the coronavirus crisis slowly built. Earlier this week, the yellow metal hit seven-year highs just short of $1,700 — raising hopes that it might have a shot later in the year at cracking the $1,900 record high.

Yet, over the past four sessions, both gold futures and bullion descended into the red, before finally tumbling on Friday. Two reasons were cited by analysts: higher margin calls imposed on gold traders and selling by hedge funds to cover losses elsewhere.

“Why are we not at $1,700 on gold? That’s because hedge funds do not want a disastrous February performance and need to sell winning gold positions to counter their losing stock holdings,” said Ed Moya at New York-based online trading platform OANDA.

Others exited because of higher margin calls imposed on gold trades, which meant “they need cash to stay or they need to leave”, said George Gero, managing director at RBC Wealth Management.

Still, there were hopes that after Friday’s shake-out, gold would attempt a return to $1,600.

“Gold should start showing signs of life regardless of what stocks do over the next couple weeks,” said Moya of OANDA. “If panic selling with stocks continues next week, gold will likely reassert its safe-haven status or if markets show signs of stabilizing, we could see the broad-based commodity plunge ease.”

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