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Energy & Precious Metals - Weekly Review and Calendar Ahead

By Barani Krishnan

Investing.com - Early this week, we wrote that headline-reading algorithmic trading models will be looking out for anything even remotely positive on the trade deal to continue driving crude prices higher. We forgot to add another thing that’s been in the algo-crude lexicon for much longer: OPEC.

Speculation that the oil cartel and its allies will pull some magic rabbit out of the hat at their December meeting to somehow push crude prices up has been brimming since last week because that’s essentially what OPEC does: drive the market up.

After two days of severe beating on demand concerns as it dawned on both the algos and the humans that an imminent trade deal was little more than hogwash, OPEC made its move. With a news leak on the fourth day to Reuters through an anonymous source, the cartel sent out the message it had saved for December: that the current pact it had with its allies to cut production by 1.2 million barrels per day will be extended till June.

Big deal … oil bears might have thought, given that the real expectation was for OPEC to deepen cuts beyond the 1.2 million barrels per day. But oil bulls indeed pounced on the Reuters revelation as a “big deal”. Russian President Vladimir Putin himself lent credence to the story - that as OPEC’s biggest ally, Moscow will provide unstinting support to the output cuts. The truth is Russia has broken almost every promise made to OPEC in the past on production cuts.

Whatever the case, between Wednesday and Thursday, crude prices jumped 5% in all, ending a volatile week just in the positive. NYMEX-traded WTI settled at $57.77 per barrel while ICE Futures-traded Brent closed at $63.39, rising less than a less dime each on the week.

Gold, meanwhile, settled with just a modest decline on the week as traders tried to stay above the fray of the constant back-and-forth in U.S.-China negotiations that sent all sorts of conflicting signals to the market.

Energy Review

Does OPEC have anything at all to talk about come December, given the leak on its plan to extend till June its existing cuts of 1.2 million bpd?

Sure, the cartel will have plenty to say, if not about demand for its own oil, then about it what envisages as the plunging production in shale — its main rival.

OPEC Secretary-General Mohamed Barkindo opened the salvo against shale last week, saying after talking to “a number of producers, especially in the shale basin, there is a growing concern by themselves that the slowdown is almost graduating into a fast deceleration.”

Barkindo added that these companies “are telling us that we are probably more optimistic than they are considering the variety of headwind challenges they are facing.”

In reality, what OPEC needs to address is the persistent overproduction by serial offenders such as Nigeria and Iraq - even non-member ally Russia - that make it a challenge for the cartel’s de-facto leader Saudi Arabia to stick to the 1.2 million barrels per day of cuts agreed nearly a year ago. With the mega stock sale of Aramco, the Saudi state oil company, just around the corner, the kingdom prefers to enforce the existing production pact and somehow keep prices up, without getting into deeper cuts.

And helping the weakening shale narrative might be the U.S. drilling companies themselves.

While the U.S. oil rig count fell for a fifth consecutive week last week amid continuous capex cutbacks announced by drillers in quarterly forecasts, reported developments concerning one oil major were nothing short of stunning.

Chevron (NYSE:CVX), the No. 2 U.S. oil and gas company, is planning a major cost-cutting exercise that would particularly shake up its shale operations, Reuters reported on Friday, quoting people familiar with the matter.

Under CEO Michael Wirth’s plan, Chevron’s revamp could include a standalone shale unit, like those at rivals Exxon Mobil (NYSE:XOM) and BP (LON:BP). In April, Exxon condensed seven of its business units into three to better coordinate output with its logistics and refining businesses.

Shale, which did not exist in Chevron’s portfolio 10 years ago, will make up about 27% of its total production by 2023. Chevron has been heavily investing in the Permian Basin, the top U.S. shale field, but has not yet turned a profit from shale. The company expects the investment to start generating free cash next year.

Yes, there will be lots of opportunity to bash shale in the coming weeks through the December 5-6 OPEC meeting.

Energy Calendar Ahead

Monday, Nov 25

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Nov 26

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Nov 27

EIA weekly report on oil stockpiles

EIA weekly natural gas report

Thursday, Nov 21

Thanksgiving Holiday

Friday, Nov 22

Baker Hughes weekly rig count.

Precious Metals Review

When nothing looks clear, just hold. That seems to be the guide for gold traders these days as the constant back-and-forth in U.S.-China trade negotiations sends all sorts of conflicting signals to the market.

Gold had a mixed week after China’s President Xi Jinping said Beijing wanted a deal with the United States, but will fight back if necessary against his counterpart Donald Trump’s threat that Chinese imports will face more duties from Dec 15 if a phase one agreement isn’t inked by then. Trump, in latest comments, said a deal was “potentially very close”.

Gold traders have had a challenging week discerning direction from the constant shifting in goalposts in the U.S.-China trade match.

“We have been working actively to try not to have a trade war. We did not initiate this trade war, and this is not something we want,” President Xi said in remarks to journalists pooled by the South China Morning Post.

But he added that his administration also intended to “restore China’s dignity and status” and ensure the history of it being invaded and ruled by colonial powers once would “never be repeated again”.

Gold futures for December delivery on New York’s COMEX settled at $1,463.60 per ounce. Spot gold, which tracks live trades in bullion, saw a final trade at $1,462.11. For the week, both benchmarks showed a modest decline about 0.4%.

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