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By Barani Krishnan
Investing.com -- With the Federal Reserve’s rate hike for July academic by now and the U.S. already in recession territory, albeit technically, the oil market is concerned about only one other thing - what OPEC+ will do in the coming week.
With gold, the focus will be on the dollar and bond yields after a spurt higher in the Personal Consumption Expenditure Index on Friday, as the Fed’s preferred inflation indicator ticked up amid a fourth rate hike by the central bank this year.
OPEC+ - the alliance tying the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 other oil producers steered by Russia - meets Wednesday to decide on September output quotas for the 23 nations in the group.
Wire reports so far indicate that OPEC+ will likely leave production as it is or raise it just slightly for September.
When President Joe Biden stepped off Air Force One in mid-July for a meeting with Saudi Crown Prince Mohammed bin Salman, most media outlets had hyped the visit as one that would ostensibly be met with a goodwill gesture of oil from the OPEC head state, and then spawned the narrative of failed mission when no such gesture came forth immediately.
Anyone with a good understanding of OPEC’s true intentions and how these translate to its production goals, as well as how long it can take to turn diplomatic efforts into action would have had very different expectations compared with the media spin. That includes White House officials who have made it clear from the start that any production increase will be staggered over time.
Anyone who knows OPEC+ well enough will also know that while the Saudis hold the main levers to the alliance’s production, the chummy relationship between the House of Saud and the Kremlin - particularly between the crown prince and Vladimir Putin - should never be ignored.
The Russian president is determined not to let the U.S. gain any advantage from his nation’s war against Ukraine. That includes benefits extended by an oil-producing alliance with Moscow in it - particularly when the West’s sanctions have already caused heavy discounting in prices of Russian crude, not to mention efforts by Biden to put a cap next on the price of that oil.
As expected, less than a week after Biden’s visit, Putin placed a call to Crown Prince MbS - as the young monarch is known by his initials - to remind him of the importance of continued collaboration between the two nations within the OPEC+ spirit.
For further measure, Russian Deputy Prime Minister Alexander Novak met Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman on Friday, after a statement out of Moscow said: “Russia and Saudi Arabia remain firmly committed to the goals of the OPEC+ agreement to preserve market stability and balance supply and demand in the global oil markets”.
But MbS is in a bit of a delicate spot himself. Having fist-bumped and welcomed Biden, he has opened himself up to at least thawing the cold war that had been running between him and the president who once vowed to make a pariah of his kingdom for the murder of the Saudi-born-U.S.-resident-turned journalist Jamal Khashoggi, whom the CIA says was killed on the crown prince’s order. The Saudis, of course, deny that allegation.
MbS also wants more emphatic U.S. support for Riyadh in the Yemen conflict. Both the crown prince and his counterpart in the United Arab Emirates, Mohammed bin Zayed Al Nahyan, have been frustrated with Biden’s indifference toward them previously, as well as failure to address Gulf concerns about Iran's missile program and its regional proxies. All that had looked to change promisingly with Biden’s visit.
Prior to Biden’s visit, OPEC+ had already bumped up production by 50% from June levels to reach almost 650,000 barrels per day for July and August. If it maintains that for September, or raises it by between 10,000 or 20,000 bpd, it would still be good from the alliance’s perspective and a win — albeit, a measured one, for Biden. Most importantly, OPEC+ shouldn’t slash production at this point. And there’s danger of that happening if crude prices, which fell from Ukraine-invasion highs of $140 in March to below $100 last week, continue falling.
As it stands, OPEC+ would have unwound all its historic pandemic-era production cuts by next month. It’s now at a crossroads where output is concerned.
Oil: Market Settlements and Activity
U.S. crude’s West Texas Intermediate, or WTI, benchmark settled up on Friday for a third time during the week, but still finished below the key $100 per barrel level and down for a second straight month for July.
London-traded Brent, the global benchmark for oil, remained above the three-digit pricing mark but posted losses for July.
WTI for September delivery did a final trade of $98.30 per barrel after settling Friday's session up $2.20, or 2.3%, at $98.62.
For the week, September WTI was up 4.1%, after a decline of 13% over three preceding weeks.
WTI also posted a monthly loss of 7.2% for July, after June’s 7.4% slide.
Brent for October delivery did a final trade of $104, after settling Friday’s session up $2.14, or 2.1%, at $103.97.
For the week, October Brent was up 5.7%, extending last week’s 2.7%. Prior to that, Brent had fallen a cumulative 17% over five weeks.
Brent for October delivery showed a decline of about 4.5% for July, after June’s 5.7% drop.
Oil: WTI Price Outlook
WTI’s weekly setup hints at a continuation of price recovery, at least from a technical standpoint, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.
“As long as prices sustain above the 50-Week Exponential Moving Average of $93.08, the momentum can continue to retest a week high of $101.87,” said Dixit. He put this down to the 38.2% Fibonacci level retracement of the $62.45 - $130.50 move and extension to the weekly middle Bollinger Band of $107.
But based on WTI’s weak closing for July, he said the monthly chart still indicated a bearish outlook, citing the stochastic 53/65 reading that continued with negative overlap.
“Weaknesses below the 50-Week EMA of $93.08 would attract selling towards the swing low of $90.58,” he added.
Gold: Market Settlements and Activity
Benchmark August gold futures on New York’s Comex did a final trade of $1,764 on Friday after settling the session up $12.60, or 0.7%, at $1,762.90. The session high was $1,765.85.
For the week, August gold rose 2.1%, its most since a 4.2% gain during the week to Feb. 25.
Beyond the expiring August contract, Comex’s most active gold contract for December settled up $12.60 on the day at $1,781.80. The peak for December gold was $1784.60.
Gold could continue rising until $1,800 if the dollar and bond yields retreat further from projections for softer Federal Reserve rate hikes through the remainder of the year, said Ed Moya, analyst at online trading platform OANDA.
Gold’s uptick came after the Commerce Department reported on Thursday that U.S. gross domestic product posted a negative 0.9% growth in the second quarter, after a contraction of 1.6% in first quarter GDP. The back-to-back negative quarters technically place the economy in a recession.
But the Personal Consumption Expenditure Index - an inflation indicator closely followed by the Federal Reserve - grew 6.8% in the year to June after being dormant in two earlier months, intensifying the central bank’s fight against price growth.
With the PCE’s rise for June, it indicated that inflation was relentless at four-decade highs, and that the Fed may not be done yet with the super-sized rate hikes it has carried out this year to fight price growth. The central bank has raised rates four times already this year since March, with the latest two increases of 75 basis points being the highest of their kind in 28 years.
Gold: Price Outlook
Dixit of skcharting said momentum helped gold clear the $1750 challenge, and cross the “magic number” of $1,768 before giving it a second bullish weekly closing, this time at $1,765.
He said the weekly Relative Strength Indicator turned bullish, rising from 32 to 41 while the stochastic readings of 33/17 established a decisive rebound.
“The main target is a technical confluence zone of 50-Week EMA of $1,830 and the 100-Week Simple Moving Average of $1,831,” he said.
Dixit said gold’s daily chart showed $1,735-$1,725 as a support area. “The daily Stochastic now at 96/89 is rushing towards the overbought zone and is likely to cause short-term correction at the $1,777-$1,785-$1,805 resistance cluster that could result in prices dropping towards $1,735-$1,725.”
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.