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Energy & precious metals - weekly review and outlook

Energy & precious metals - weekly review and outlook

Has U.S. gasoline demand peaked for this time of year? Well, that’s what the Labor Day holiday supposedly says. 

To be sure, the Energy Information Administration, or EIA, reminded us in its “This Week in Petroleum” report that the Sept 2-4 holiday weekend marks the unofficial end to the U.S. summer driving season. 

As of Friday, average pump prices of gasoline listed by the American Automobile Association, or AAA, weren’t far either from year-ago levels, signaling a calm market.

But a look at the futures markets for petroleum suggests this could be more like the calm before the storm, with crude prices rising 7% on the week. 

And, quite literally, it is the storm season, with Idalia, the first major hurricane of this year, pummeling Florida with a surge of seawater on Wednesday that flooded neighborhoods along much of the state’s western coast, cut power and leveled trees. 

But the damage inflicted by the Category 3 hurricane when it made landfall on Wednesday morning could have been far worse. By a stroke of meteorological good fortune, Idialia came ashore in a marshy and thinly populated part of Florida, southeast of Tallahassee.

Hurricanes often damage oil refineries, causing prices of fuels like gasoline to soar. Idalia was also an exception on this front, pulling it away from most Gulf of Mexico refineries. In fact, the net effect of the hurricane was actually negative to fuel prices.

In 2017, Hurricane Harvey triggered major refinery outages and brought enough damage to oil industry installations that forced some to close. More than 4 million barrels of refining capacity went offline temporarily from a refining capacity of some 18 million. Gasoline prices rose about 20 cents per gallon in the days afterward.

Hurricane Ida in 2021 was also responsible for energy disruptions and carnage. 

As the impact of this week's Hurricane Idalia passes over, business activity in Florida and Georgia will likely decline for a few days. Florida alone accounted for about 6.6% of U.S. gasoline consumption and 3.9% of diesel consumption as of 2021, according to Tudor Pickering Holt analyst Matthew Blair, who used data from the Energy Information Administration. Blair, in comments carried by Barron's, said he expects the hurricane to be “a small headwind for the refining space.” 

While refiners’ margins are below the record levels they hit shortly after Russia’s invasion of Ukraine last year, they have stayed strong as jet fuel demand has risen and economic activity in several parts of the world has rebounded from the days of COVID-19 restrictions. Some refinery outages - not related to hurricanes - have also reduced capacity.

Diesel cracks, or the margin between the cost of oil and diesel, have rebounded above $50 from below $20 in May, according to Bank of America.

“Since [May], diesel cracks have performed exceptionally well, as persistent refinery issues and a recovery in jet fuel demand offset soft diesel consumption, keeping inventories tight,” wrote Bank of America analyst Francisco Blanch.

Notwithstanding that, distillates, represented by heating oil futures, fell 6% on the week. Gasoline futures lost even more - 9%. 

The EIA’s reporting of weekly fuel stockpiles could be reason for this, with the agency citing a distillates build of 1.235M, against a forecast of 0.189M and a previous weekly gain of 0.945M. 

For gasoline stockpiles, the decline was well below expectations, with a drop of 0.214M versus the forecast slide of 0.933M and the previous week’s pull of 1.467M.

Only crude prices had an outsized rally - reacting to a large U.S. inventory decline for a third week in a row and on expectations that the Saudi production cut of one million barrels per day will run into a fourth month in October. 

“Everyone’s looking at the flat price of crude oil and saying gasoline and diesel prices will also go to the moon,” said John Kilduff, founding partner of New York-based energy hedge fund Again Capital. “But fuel uptake for this summer is still very much down to earth, higher than a year ago, yes, but still below pre-pandemic levels.” 

“You have an odd situation where the Saudis are trying to create a supply situation even lower than the seasonal lows in demand,” Kilduff continued. “All I’ll say is don’t test the mettle of consumers and the global economy because when either collapses, your dream of higher and higher prices will also go with that.”  

The four-week average of U.S. gasoline consumption - the best gauge of fuel demand -  was at 9.033M barrels per day for the week ended Aug. 25 versus the year-ago level of 8.874M. 

But consumption is still well below pre-pandemic levels, with 9.777M barrels used daily for the comparative week to Aug 23, 2019.  

The National Oceanic and Atmospheric Administration, or NOAA, which flags all major weather changes in the United States, listed just a couple of storm threats in the Atlantic this week, after the passing of Idalia. But it’s still very early in the hurricane season, and the threat of carnage cannot be underplayed.

In 2022, a total of 17 hurricanes were recorded, with three of them - Ian, Nicole and Fiona - bringing extensive damage to Florida's coast and to Puerto Rico.

Ian was the sole storm that season to significantly disrupt offshore oil production in the Gulf of Mexico. About 11% of production in the Gulf was shut-in by September 27 in preparation for the storm, which hit the area as a category 4 hurricane.

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Oil companies evacuated personnel from 14 platforms and rigs in anticipation of the storm, and approximately 190,000 barrels of oil per day in production were lost as a result of the disruption.

Tankers and vessels also cleared the eastern region of the Gulf of Mexico.

These measures meant that, although production was affected, no crew members were reported lost or injured as a result of Hurricane Ian or any other named storm in 2022.

This is a far cry from 2021, when the crew of the Noble-owned and Shell-leased drillship, Globetrotter II, was left to weather Hurricane Ida. Her crew of 142 were tossed about, believing they were going to capsize and sink, as 150-mph winds and 80-foot waves battered the vessel. The Coast Guard was able to rescue all of the crew members, but not before they suffered significant mental and physical trauma.

In 2020, Hurricane Zeta nearly claimed another rig, Transocean’s Deepwater Asgard.

As I said in my previous post, hurricanes haven’t left too much of a toll on the U.S. oil industry over the past three years. With Mother Nature’s will, this year won't be an exception.

Oil: Market Settlements and Activity 

New York-traded West Texas Intermediate, or WTI, crude did a final trade of $86.05 per barrel on Friday after officially settling the session at $85.55 per barrel - up $1.92, or 2.3%. For the week, the U.S. crude benchmark finished up 7.2%. That was after a combined 4% drop over two prior weeks as the economy in top importer China sputtered. Prior to that, WTI gained 20% over seven weeks. 

London-traded Brent did a final trade of $88.99 per barrel on Friday after officially settling the session at $88.55 - up $1.72, or 2%. For the week, Brent rose 4.8%. That was after a combined 2.3% drop over two weeks. Prior to that, the global crude benchmark rose for seven weeks in a row, gaining a total of 18%.

Oil: WTI Technical Outlook

The U.S. crude benchmark is veering towards an overbought situation and in need of a correction to resume a healthy rally, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Momentum has reached a critical inflection point with limited room for further upside, which will have to retest the monthly middle Bollinger Band $86.80 as target,” said Dixit. “This is very likely to witness selling pressure as short-term price action reaches overbought conditions.”

On the flip side, a strong consolidation above the monthly middle Bollinger Band $86.80 could open the way for the next bullish wave towards the Nov 2022 high of $93.70, Dixit said.

But a more likely scenario is a temporary pullback towards the horizontal support zone of $84.90 - $84.40, he said.

This could even extend towards $82.40 and the Daily Middle Bollinger Band of $81.40 which would do well for WTI, Dixit added. 

Gold: Market Settlements and Activity 

Gold prices neared a one-month high Friday before consolidating to end the week up just over 1% after a mixed U.S. jobs report for August, where payrolls came in higher than forecast but unemployment also rose, touching 18-month highs.

The U.S. economy added 187,000 non-farm payrolls last month against a forecast 170,000 while the jobless rate perked to 3.8% from a previous 3.5%, the Labor Department said. The mixed reading conveyed the messaging that the Federal Reserve might not immediately resort to more rate hikes to bring inflation to its long-standing target of 2% per annum from the about 3% it hovers at now.

In Friday’s trade, gold futures’ most-active December contract on New York’s Comex did a final trade of $1,966.20 on Friday, after officially settling the session at $1,967.10, up $1.20, or 0.06%. The session peak for December gold was $1,981.70 an ounce, its highest since Aug. 7. For the week, it rose 1.4% despite falling 2% for all of August.

The spot price of gold, which is more closely followed than futures by some traders, settled at $1,940.28 an ounce, up 16 cents, or 0.01%. Earlier in the session, the spot price, which is reflective of real-time trades in bullion, rose to less than a penny off $1,953, its highest since Aug. 2.

Gold rallied then settled off its highs as the non-farm payrolls for August, at the least, “signal interest rates may not rise any further”, something all risk assets seemed to take positively, said Craig Erlam, analyst at online trading platform OANDA.

The Fed has three more opportunities to raise rates this year, with its policy-making Federal Open Market Committee having rate decisions scheduled on September 20, November 1 and December 13. 

With jobs still growing more than expected each month, the central bank could opt for one or two more hikes this year. 

Yet, any growth in unemployment as well, as evidenced in August, will complicate the Fed’s decision-making process on this. Aside from keeping inflation at or below 2%, the central bank is mandated by the US Congress to provide maximum employment to Americans - a target identified by a jobless rate of 4% or below. Last month’s unemployment rate of 3.8% was the highest since February 2021.

“The November [rate] hike odds are down to 36% and once that hits zero, there are no hikes to 'price out' any longer and it will become a waiting game for [interest rate] cuts,” economist Adam Button said, commenting on ForexLive platform. 

The Fed has vowed not to cut rates so long as inflation stays above 2%, setting the central bank up for what could possibly be a protracted battle in achieving its target.

The changes suggest the Fed would have to ponder more deeply on how to proceed with interest rates as it targets for inflation to return to the annual 2% or less level seen before the COVID-19 outbreak in March 2020.

Inflation rose as much as 9.1% year-on-year in June 2022, hitting four-decade highs as the government spent trillions of dollars fighting the pandemic. As of last month, inflation had moderated to an annual growth of 3% after the Fed raised interest rates to 5.5% from a base rate of just 0.25% in March 2022. While pandemic-related spending is now over, robust jobs growth and wage growth are keeping the Fed from achieving its 2% target for inflation, the central bank said.

Gold: Spot Price Outlook 

Spot gold had a second week of advances but still fell short of a finish that would have positioned it for a greater run higher, said SKCharting’s Dixit.

“Unconvinced traders failed to establish a day/week closing above the 200-day SMA, or Simple Moving Average, of $1,954 and the descending Weekly Middle Bollinger Band of $1,951,” he said. “Thus, the spot price settled at $1,939.”

Going into the week ahead, the 50-day EMA, or Exponential Moving Average, of  $1,931 presents active support, Dixit. “A consistent break below $1931 will ease the path for a drop to the 200-day SMA, or Simple Moving Average, of $1,914.” 

On the positive side, stability above $1,942-$1,945 will favor a retest of the $1,951-$1,954 level.

“Strong acceptance above this zone will eventually extend the bullish momentum targeting $1,965,” said Dixit. “Failure to establish above $1,954 will eventually resume the downward correction.”

Natural gas: Market Settlements and Activity 

The front-month October gas contract on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.762 per mmBtu, or million metric British thermal units on Friday after officially settling the session at $2.765, virtually flat on the day.

For the week though, October gas jumped 22.5 cents, or 8.85%. The U.S. gas benchmark also scaled a three-week high of $2.865 in Thursday’s session.

Natural gas: Technical Outlook

Dixit of SKCharting noted that in yet another bullish weekly rebound, natural gas had the descending 200-day SMA perfectly aligned with the swing high of $3.00 psychological handle.

“If this zone is successfully cleared with price action stability above the line, expect to witness gains reaching overhead resistance at the monthly Middle Bollinger Band of $3.25,” said Dixit. “Our major upside target is the 50-week EMA of $3.46.” - investing.com

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