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Energy & Precious Metals - Weekly Review and Calendar Ahead

Investing.com - What difference a week makes.

On the first Friday of 2020, U.S. West Texas Intermediate hit eight-month highs above $64 per barrel. As this Friday came to a close, the U.S. crude benchmark had posted its biggest weekly loss in more than six months.

Within a week, the world had come to the brink of a U.S.-Iran war and moved far from it, wiping out the risk premium that had created much of the froth in oil that first week.

Supply of crude and fuel products have, meanwhile, surged to levels not seen for a year, adding to the distress of oil bulls.

To those who braved this week’s $4 per barrel crash, the perplexing question is: What bullets do the market have left, if any, to shoot back higher?

The answer, of course, is OPEC production cuts. And — briefly, perhaps — the U.S.-China phase one deal that is scheduled to be signed at the White House this week, according to both the Trump and Xi administrations.

Firstly, the OPEC cuts. Even if these were to deepen in the first quarter as proposed, Russia’s visible unease in sticking with the market manipulation planned by Saudi Arabia and other allies in the Organization of the Petroleum Exporting Countries is sending smoke signals of a different kind to the market.

If Russia loses its zest to stay in the so-called OPEC+ and contribute to the alliance’s production cuts beyond the first quarter, the market could be pretty much smoked. Moscow hasn’t shown any serious intent yet to quit the partnership. But it’s growing increasingly anxious about the loss in market share OPEC+ is causing Russian oil exports, especially with U.S. crude shipments hitting record highs at the start of the year. OPEC+ meets in Vienna on March 4-6 and Moscow could make its decision then.

The phase one deal is also worrying some in the market. The two nations insist there’s a deal but haven’t given any specifics of what will be signed. The content of the deal might be crucial to determining how much of U.S. crude China will buy in a year.

So, with geopolitical risk deflated again, and the prospect of Russia reducing its commitment to OPEC+ growing by the day, where could WTI and Brent, the global crude benchmark, go this week?

Most analysts are betting that with U.S. crude having broken the $60 handle, WTI will trade in a range slightly under that support. Similarly for Brent, which settled at its lowest in a month on Friday at below $65.

Interestingly, the outlook for gold is as muddy as oil’s, although on the higher side.

Like oil, gold spiked in the aftermath of the U.S.-Iran tensions, reaching near 7-year highs of $1,600, after Tehran launched rocket attacks on American airbases in Iraq to avenge the U.S. killing of Iranian general Qassem Soleimani.

But even after the U.S.-Iran de-escalation, the yellow metal has remained up as investors sought a hedge against other risks, like the all-time highs in U.S. stock prices.

Analysts say that as long as Wall Street hits record highs, one can expect gold to go up, affirming the new relationship between equities and the safe-haven that bucks their previous inverse correlation

Gold futures for February delivery on New York’s COMEX settled Friday’s trade up $5.80, or 0.4%, at $1,560.10 per ounce. They hit 1,613.30 right after Iran’s rocket attacks on Tuesday.

Spot gold, which tracks live trades in bullion, settled up $9.46, or 0.6%, at 1,562.20 per ounce. It reached $1,611.52 earlier in the week.

Energy Review

The US-Iran conflict may be far from over, but worries that there may be too much oil in the market are offsetting any supply risks for now.

WTI fell 6.4% on the week, its most since the week ended June 30. Brent lost 5.3%.

Oil prices have been under pressure since Wednesday after President Donald Trump refrained from responding to Tehran’s rocket attacks on U.S.-Iraqi airbases.

Prior to that stand-down, crude had been on a strong rally, with WTI hitting an April high of $65.65 and Brent surging to near four-month peaks of $71.28, amid speculation about an all-out U.S.-Iran war.

Even media reports out of Beijing on Thursday confirming that China will sign the phase one trade deal next week couldn’t get oil up.

The United States rolled out harsher sanctions on Iran on Friday, targeting the Islamic Republic’s multi-billion-dollar metals Industry, as part of the White House’s “maximum pain” campaign aimed at crippling Tehran’s so-called nuclear ambitions.

Iran’s Revolutionary Guards commander has also vowed to take "harsher revenge" on the United States after the raid on the airbases which did not kill any U.S. servicemen.

While the U.S. strikes did not directly impact oil production and shipment, crude traders had initially priced in a higher element of risk into the market on fears that Tehran would retaliate. Both Iran and Iraq are members of OPEC, which together with Saudi Arabia, account for about 40% of the world’s oil production. On Wednesday, crude tankers deliberately avoided the Strait of Hormuz around Iran to be on the safe side, traders said.

“I can see the roll-down continuing here in the front end of WTI for the time being,” said Scott Shelton, energy futures broker at ICAP in Durham, N.C. “On the Brent side, I think there are signs that the market could see some additional strength in spreads. Other than that, I expect the market to remain quiet.”

Adding to the weight on oil has been a surge in U.S. crude and fuel inventories.

In Wednesday’s inventory data, the Energy Information Administration said crude stockpiles rose by 1.2 million barrels for the week ended January 3, versus market expectations for a decline of 3.6 million barrels.

Gasoline inventories soared by 9.1 million barrels, compared with expectations for a rise of 2.7 million barrels. Distillate stockpiles climbed by 5.3 million barrels, versus forecasts for a build of 3.9 million barrels.

Energy Calendar Ahead

Monday, Jan 13

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Jan 14

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Jan 15

EIA weekly report on oil stockpiles

Thursday, Jan 16

EIA weekly natural gas report

Friday, Jan 17

Baker Hughes weekly rig count.

Precious Metals Review

Gold rallied as the three major U.S. indexes hit record highs on Friday, before Wall Street’s close lower. The broad Dow index crossed 29,000 points the first time ever even after less-than-stellar U.S. jobs growth data for December.

While gold has typically gone in the opposite route to stocks before, since last year the inverse correlation appears to have changed as investors sought an insurance against the possibility of a sudden reversal on Wall Street after a streak of record highs in stocks.

Spot gold closed last year up 18% while gold futures gained 16%. Both rose about 0.5% or more this week, gaining almost 3% since the start of 2020.

“Gold continues its new higher trading range along with better stocks and dollar firmness,” said George Gero, precious metals analyst at RBC Wealth Management in New York. “As we see, you can’t count out gold with higher stocks and firm dollar.”

The US dollar index, another contrarian trade to gold, hit a one-week high of 97.303 on Friday before turning flat at 97.08.

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