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Energy & Precious Metals - Weekly Review and Calendar Ahead

By Barani Krishnan

Investing.com - Saudi Aramco has named the bookrunners for its IPO, showing the determination of the world’s largest oil company and the royals behind it in moving forth from last week’s unprecedented attack on Saudi energy infrastructure. The kingdom’s oil output has been less assuring though.

Aramco says half of the 5.7 million barrels per day of production initially lost from the attack was restored in days, and the balance will be back online by end-November.

Industry analysts aren’t quite sure..

Repair of the Abqaiq oil processing facility, the key target in the attack, will likely take months to complete, and not by end-September as the kingdom expects, consultant FGE said in a Sept 18 report. Full restoration of pre-attack capacity at Abqaiq could stretch till year-end, Rystad Energy, another consultancy, said.

An extended outage at a gigantic processing facility like Abqaiq would typically send oil prices soaring for days. Brent, the global crude benchmark, did experience an epic rise in the first trading session after the attack, surging nearly 20% intraday before settling up more than 14%. In subsequent days, though, it gave back a chunk of that on the notion that there was enough oil in the world, what with the United States and other governments ready to tap their reserves if necessary to relieve any tightness.

Still, that didn’t account for the heightened geopolitical premium in the market, as the U.S. and Saudis bandied to defend the kingdom and Iran vowed an all-out war if either targeted the Islamic Republic, which has been blamed for the attack despite Yemen’s Houthi rebels claiming responsibility.

And with possibility for either diplomacy or more tension as President Donald Trump to Iranian leader Hassan Rouhani take to the podium to address the U.N. General Assembly from Monday, traders are unsure how to hedge their bets — although many think the risks associated with oil makes it hard to short the market.

So, expect a lot more volatility ahead.

It’s the same story with gold, as the Saudi attack reignited gold’s potential as a safe-haven to political risk and hedge against any slowing of the global economy. The yellow metal returned to its key $1,500 perch despite gold longs being disappointed earlier in the week by another modest rate cut by the U.S. Federal Reserve.

Energy Review

After the biggest intraday gain since the 1991 Gulf War, oil prices had much of the wind sucked out of them as the week progressed.

Both Brent and U.S. West Texas Intermediate finished the week up about 6% or more. Despite the retreat, it was still Brent’s best week since December. For WTI, it was the highest weekly gain since June.

While the U.S. has blamed Iran directly for the Saudi attack, President Trump’s reaction has been limited to imposing further sanctions on the Islamic Republic — a move dismissed as symbolic given that existing sanctions haven’t pushed it into negotiating with Washington despite the crunch on its trade and capital flows.

On Friday, the U.S. said it would also send additional troops, along with enhanced air and missile defense systems, to Saudi Arabia and the United Arab Emirates as further precaution to another attack.

Trump imposed sanctions on Iran last November after pulling the U.S. out of a global nuclear pact negotiated by his predecessor Barack Obama, describing it as the “worst deal ever”.

The moral victory of making Iran “nuclear-free” — an Obama legacy that Trump intends to make his own now — will be a plum prize for him as he heads for reelection in November 2020.

Trump continues to hold out hope for a meeting with Iran’s President Rouhani on the sidelines of the U.N. assembly. But Rouhani’s aides have flatly denied there will such a thing, worrying that their president will come away empty-handed — earning the ire of the Iranian people — while Trump gets kudos for trying.

Away from the politics of the attack, Aramco reassured the market on Friday that it will have 11 million bpd of capacity back online by November, well above its current actual output level.

Much is riding on the kingdom's ability to recover from the initial attack and protect itself from future ones.

"A sustained oil price increase of $10 - $20 per barrel could cut global growth by 0.1–0.2 percentage point," IHS Markit chief economist Nariman Behravesh said in a research note.

WTI could also come under pressure in the short term after heavy rainfall in Houston that hit U.S. refinery activity. Exxon Mobil (NYSE:XOM) closed its 370,000 bpd Beaumont refinery on Thursday due to flooding. However, the floods have been nowhere near as severe as Hurricane Harvey two years ago, which knocked 4 million barrels a day of refining capacity offline.

Energy Calendar Ahead

Monday, Sept 23

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Sept 24

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Sept 25

EIA weekly report on oil stockpiles

Thursday, Sept 26

EIA weekly natural gas report

Friday, Sept 27

Baker Hughes weekly rig count

Precious Metals Review

Gold prices returned firmly to its $1,500 perch as longs priced in the political risk from the Saudi attack and potential for a global recession if the U.S.-China trade war continues to drag.

U.S. gold futures for December delivery settled up $8.90, or 0.6%, at $1,515.10 per ounce on the Comex division of the New York Mercantile Exchange. For the week, it rose 1%.

Spot gold, reflective of trades in bullion, last traded at $1,516.77, rising $17.85, or 1.2%. On the week, it was up 1.9%.

The Fed executed on Wednesday the second in U.S. interest-rate cut for the year, trimming a quarter point. That disappointed some gold longs hoping for a half point cut.

Since July, the Fed has conducted two identical rates that have combined into a 50 basis point reduction. The slow pace of cuts has allowed the U.S. dollar to absorb the moves well. Thus, instead of being hammered by the Fed action, the U.S. Dollar Index, which measures the greenback against a basket of six currencies, has been relatively strong, sliding just 0.1% on the week.

The Fed has two more policy meetings for the year, in October and December. But there’s no certainty it will cut rates again or turn more dovish then.

“There’s continued uncertainty over longer term interest rates,” said George Gero, managing director and precious metals analyst at RBC Wealth Management in New York.

“Strong U.S. spending and good jobs numbers are also keeping the Dollar Index near upper 97-98 area, holding gold at these levels.”

Notwithstanding the bullish dollar, gold remains for now the top macro trade for anyone worried about plumbing U.S. bond yields.

Weathering recent choppy moves, bullion is still up almost 18% on the year while gold futures show a gain of about 16%.

The gains come despite gold displaying little of the “charm” it showed between June and August, where it effortlessly hit 6-year highs and seemed ready to even cross into $1,600 territory.

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