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Energy & Precious Metals - Weekly Review and Calendar Ahead

By Barani Krishnan

Investing.com - Donald Trump fired his national security advisor John Bolton, but the Houthis may have lit an even bigger fuse under the motherlode of oil - Saudi Arabia.

Saturday’s drone strikes that shut the kingdom’s Abqaiq oil processing complex and Khurais oil field could impact up to nearly 5 million barrels of crude a day, or 5% of daily world supply, if early reports are to be believed.

But early reports are inconclusive, put out to sate the craving of a newscycle eager for any detail on a major event before the arrival of more credible and verified information.

According to early analyses, the strikes could negate the potential for U.S.-Iran talks and sanctions relief that bring Tehran's crude back to the market. Some of that speculation hinges, of course, on the outright blaming of Iran for Saturday's strikes by U.S. Secretary of State Mike Pompeo in a tweet. Houthi rebels, backed by Iran in the Saudi-led battle in Yemen, have claimed responsibility for the attacks, saying more would come.

Truth be told, it's Trump, not Pompeo, who will decide what happens to the sanctions on Iran. Nearly 24 hours after the attacks, the president, interestingly, had not tweeted his own response.

The shut Saudi oil facilities, together with their production, could bounce back in no time. But what happens to the price of oil is another matter. This is especially so with the Saudis desperate now to boost crude prices in any way to drive valuations up for the IPO of their state oil firm Aramco.

U.S. West Texas Intermediate crude ended the week down nearly 3%, its sharpest weekly slide since mid-July. Brent fell 2% on the week, its most in five weeks. Expect a major rally Monday on the Saudi news, and greater volatility after that as the Iranians have vowed to maximize their own production if they get a break from sanctions.

As for gold, the big story is still Thursday’s rate cut and quantitative easing announced by the European Central Bank, and what that means for the Federal Reserve’s own monetary policy when it meets Sept 17-18. But if oil gets a big pop on Monday, expect gold to rally too on safe-haven buying.

Energy Review

Compared to the fanfare generated by the two outsize U.S. crude draws at end-August, Wednesday’s weekly dataset from the EIA barely brought joy to oil bulls.

After the latest 7 million barrel draw drove WTI to 6-week highs of $58.29 and Brent to $63.26, the market sunk in reaction to the ouster of Bolton, the Trump administration’s biggest hawk on Iran.

On Thursday, new Saudi energy minister Prince Abdulaziz bin Salman told the OPEC+ producer alliance, which includes Russia, that the kingdom would continue to over-comply voluntarily with oil output cuts agreed by the group.

Earlier, in its monthly report on Wednesday, OPEC forecast that demand for its own crude will average 29.4 million barrels per day in 2020, down 1.2 million bpd from this year. U.S. crude has become the No. 1 export competitor to OPEC oil this year, shipping a steady 3 million bpd or so in recent weeks.

Chairing the panel meeting of the OPEC alliance, Prince Abdulaziz said Riyadh’s October production would be 9.890 million, and that deeper output cuts would be discussed at OPEC’s regular meeting in November.

OPEC aside, the Paris-based International Energy Agency also warned of a global oil glut on Thursday, saying risk premiums and supply threats were significantly cut as tensions in the Middle East Gulf hav eased and oil industry operations appeared to be normalizing.

Energy Calendar Ahead

Monday, Sept 16

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Sept 17

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Sept 18

EIA weekly report on oil stockpiles

U.S. Federal Reserve monetary policy decision

Thursday, Sept 19

EIA weekly natural gas report

Friday, Sept 20

Baker Hughes weekly rig count

Precious Metals Review

The ECB delivered a rate cut as expected, but gold still couldn’t shine last week as perceived progress in U.S.-Sino negotiations - whatever that meant - landed a fresh blow on the yellow metal.

U.S. gold futures for December delivery settled at $1,499.50 per ounce on the Comex division of the New York Mercantile Exchange, losing 1.1% on the week. It was gold futures’ third straight weekly drop and biggest weekly decline since April.

Spot gold, reflective of trades in bullion, also remained below the key $1,500 level. It settled Friday’s trade at 1,488.74, down about 1.2% on the week for its worst week since late March.

Global economic worries took a back seat during the week after trade concessions from both the United States and China and President Donald Trump's latest comments that he was potentially open to an interim trade deal with China.

"It doesn't mean we will have a trade deal, but maybe a possibility that the U.S. and China might postpone the new tariffs and possibly even relax some of the tariffs that are already in place," Peter Cardillo, chief market economist at Spartan Capital Securities in New York, was quoted saying on Reuters. "It's a market of hope. A hope of a cosmetic resolution."

Just on Thursday, gold appeared to be on a new breakout higher after the European Central Bank cut its deposit rate to a record low of -0.5%, while promising that rates would stay low for longer and said it would restart bond purchases at a rate of 20 billion euros a month from Nov. 1.

The Eurozone action pressures the U.S. Federal Reserve, which holds its meets its monthly policy meeting Sept 17-18, to respond with dovish measures of its own kind.

But the notion of improving U.S.-Sino trade relations, along with stronger-than-expected U.S. retail sales and consumer sentiment data for August, stopped gold from breaking new ground Friday. The better economic data, particularly, dents hopes for a 50 basis-point cut in Fed rates next week. According to Investing.com’s Fed rate monitor tool, the market still sees an 78.5% chance of a quarter-point cut by the U.S. central bank.

“Signaling of additional cuts this year will be the main driver” for gold, TD Securities said in a note on precious metals shared with Investing.com.

“A failure to leave the door open for further easing, and the dot plot not showing increasing calls for 75bps of cuts this year could be taken as a disappointment for the yellow metal,” the Canadian bank and broking group said.

But while there could be disappointment in the near term, any dips should be shallow, TD Securities added. “Underlying economic weakness, dovish central bank tilt, and shortage of safe haven assets still suggests the path of least resistance for gold and friends is higher.”

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