By Barani Krishnan
Investing.com - The Memorial Day weekend is here, bringing the crude market to its most anticipated demand period of the year.
But will that be enough to save the day for oil bulls?
Last week was testimony of the multiple countervailing themes at work in oil, as the market experienced its worst weekly loss for the year. Just a week ago, crude futures set 2019 highs on tensions ratcheting up in the Gulf amid Saudi allegations of Iranian sabotage of its oil infrastructure and a U.S. military buildup in the region in anticipation of a Tehran attack. But all that high-charging sentiment vanished within a week, after the Trump administration upped the ante in its trade war with China, raising fears about a global recession and slump in oil demand.
Gold also enters a new phase of uncertainty on its role as safe-haven, after the U.S. dollar made a return as a preferred hedge against the U.S.-Sino trade war. The greenback’s supremacy to the pound has also made it a better alternative than gold for investors seeking a hedge to Brexit. This was particularly visible after British Prime Minister Theresa May announced her decision to resign on Friday, raising fresh questions about Britain’s divorce from the EU.
Few in the oil trade would have imagined losing their shirts because of a cellphone company. Yet, that’s essentially what Donald Trump’s conflict with China comes down to. The U.S. President’s move to put Chinese mobile giant Huawei at the center of his protracted trade and intellectual property battle with Beijing sent tremors across macro markets fearing more of such action that could undermine global business.
Oil prices were already tottering by Wednesday after an unexpected 5 million-barrel build in U.S. crude stockpiles for a second week in a row. Crude inventories usually draw down at this time of year as refineries ramp up gasoline making to ensure more than enough fuel for Americans hitting the road for Memorial Day. But refiners have been slow in taking up crude this year, with profit margins for making gas, jet and other transportation fuels down 25% from a year ago.
Oil bulls had always counted on U.S. refineries to deliver the demand required for keeping crude prices strong in the run-up to summer. That seasonal trend hasn’t come through this year as refining plants ended up doing longer-than-expected maintenance and processing less crude than anticipated, becoming a new source of frustration to oil bulls already reeling from stubbornly highly U.S. crude production.
And last week’s data showed not only an inventory rise in crude but also products. Total gasoline inventories increased by 3.7 million barrels against forecasts for a drop of nearly 816,000. Distillate stockpiles, which include diesel and other transportation fuels, rose by 800,000 barrels last week versus expectations for a drop of 48,000 barrels.
With physical demand for oil already in question, Trump’s actions against Huawei rattled the financial side of the game, creating a perfect storm for oil bulls.
WTI fell 6% on Thursday alone, crashing below its $60 per barrel support of the past month while Brent slumped 5% to below its $70-per-barrel perch. It was the worst trading day for crude since the beginning of the year and OPEC production cuts that started in December.
Oil did recover somewhat on Friday on buying from bottom-fishers looking for bargains ahead of the anticipated pick up in gasoline demand for Memorial Day. But that didn’t save the week for oil longs as WTI posted a net weekly loss of nearly 7% while Brent slid about 5%. Oil is still up substantially for the year, with the U.S. benchmark crude up 29% and its U.K. peer ahead by almost 28%. How well those gains hold up will be decided by this week’s data from the American Automobile Association on Memorial Day road traffic estimates, and whether crude stockpiles drew down or rose for another week.
Energy Calendar Ahead
Tuesday, May 28
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, May 29
The EIA weekly report on oil stockpiles.
Thursday, May 30
EIA weekly natural gas report
Friday, May 31
Baker Hughes weekly rig count.
Precious Metals Review
Theresa May's decision to step down from Britain's premiership pushed both U.S. gold futures and the dollar lower on Friday as investors cut back on safe-havens as the tenure of one Brexit's most controversial actors came to a close.
Bullion and gold futures had earlier jumped nearly 1% on Thursday, their biggest spring in nearly two weeks, as investors fleeing risk on fears of a heightened U.S.-China trade war embraced the yellow metal while dumping everything else from equities to oil.
Gold's direction in the coming week would be decided by May's replacement, and whether the candidate will continue pushing for Brexit, which would further weaken the pound then and boost the yellow metal.
Spot gold, reflective of trades in bullion, last traded at $1,284.87 per ounce, up 0.1% on the day.
Gold futures for June delivery, traded on the Comex division of the New York Mercantile Exchange, settled down $1.80, or 0.1%, at $1,283.60 per ounce.
The Dollar Index, which measures the greenback against a basket of six currencies, fell 0.3% to 97.44.
"If a pro-Brexit Tory leader is elected, such as Boris Johnson, then this could lead to further declines for sterling," said Fawad Razaqzada, analyst at FOREX.com. "But essentially it will be a wait-and-see situation in the very short-term outlook and the pound could see short-lived spikes here and there."
Precious Metals Calendar Ahead
Monday, May 27
South Korean Consumer Confidence
Japan Corporate Services Price Index
Tuesday, May 28
Japan Core CPI (YoY)
German Import Price Index (MoM) (Apr)
EU Business and Consumer Survey (May)
U.S. House Price Index (YoY) (Mar)
Wednesday, May 29
French GDP (QoQ) (Q1)
U.S. Redbook (YoY)
Thursday, May 30
U.S. GDP (QoQ) (Q1)
U.S. Goods Trade Balance (Apr)
U.S. Initial Jobless Claims
U.S. Wholesale Inventories (MoM) (Apr)
U.S. FOMC Member Clarida Speaks
Japan Unemployment Rate (Apr)
Japan Industrial Production (MoM) (Apr)
Friday, May 31
German Retail Sales (YoY) (Apr)
Britain BoE Consumer Credit (Apr)
German CPI (YoY) (May)
U.S. Core PCE Price Index (YoY) (Apr)