By Barani Krishnan
- It was another week of geopolitics vs demand worries that seemed all too familiar in oil, only that the outcome was higher prices this time versus the previous week’s collapse.
Newly-minted British Prime Minister Boris Johnson became the latest cast member of the UK-Iran tanker-hostage saga, passing the week without changing a word in the script. Equally interesting was U.S. Secretary of State Mike Pompeo’s offer to be top negotiator in the nuclear conflict with Tehran, without the other side seeing the need to even respond.
At the end, tensions in the Middle East provided much better support to crude prices than in weeks past, with the market settling up every session except Wednesday’s. The one negative session that almost undid all of the week’s gains came - oddly - on the back of a 11-million-barrel crude draw. The second largest drawdown for this summer had its value diminished by talk that it was skewed to the effects of Hurricane Barry rather than actual demand for oil.
All of which means the market could remain volatile in the near-term unless a proper catalyst emerges for directional trade.
Which brings us to the coming week’s agenda and what could be the single largest event this year for not only oil but also gold and most other commodities: the first U.S. rate cut in a decade. Until Friday, there were still posers on whether a rate cut is likely, as better-than-expected GDP for the second quarter raised doubts about the widely-anticipated Federal Reserve easing set for July 31.
Apart from the Fed, the central banks of Japan and England also face interest rate decisions in the coming week. That aside, the U.S. jobs report for July, along with Chinese, U.S. and euro zone manufacturing PMI, among others, make up for a data-heavy week that again pits concerns about the global economy versus official response.
When a 11-million-barrel crude drawdown can’t help oil prices break out and sustain a powerful rally, there must be something working seriously against the market’s fundamentals.
And that “something” was Hurricane Barry, a storm that oil bulls now wish they rather not had.
Preemptively shutting down more than half of the oil output capacity on the Gulf Coast of Mexico to inject some premium into crude during the week ended July 12, Barry became a non-event almost as soon as it made landfall in Louisiana on July 13, avoiding the region’s key production spots.
And oil bears are determined that any lingering positive impact the hurricane has on U.S. crude balances be viewed from the same lens - i.e. the lack of production prior to the storm’s landfall. Therefore, outsize stockpile reductions of the past two weeks have been dismissed as numbers exaggerated by the hurricane’s disruption of regular crude flows to the market, rather than a measure of implied demand. Poof went the initial crude rally that accompanied the drawdowns!
That U.S. West Texas Intermediate crude settled the week up just 0.5% and Brent 1% - after losses of 7.5% and 6%, respectively, in the week prior - underscores oil’s difficulty to catch and sustain a bid despite real threats to crude tankers plying the Strait of Hormuz, the world’s busiest and narrowest seaway for oil.
In the coming week, crude traders’ emphasis on geopolitics and other risks may be even less as attention will mostly be on the July 30-31 Fed policy meeting, and the U.S. July jobs report and other macroeconomic data that could make - or break - the fortunes of oil.
Energy Calendar Ahead
Monday, July 29
Genscape Cushing crude stockpiles (private data)
Tuesday, July 30
American Petroleum Institute weekly report on oil stockpiles.
Opening of Fed Monthly Policy Meeting
Wednesday, July 31
EIA weekly report on oil stockpiles
Fed Interest Rate Decision, FOMC Statement & Press Conference
Thursday, Aug 1
EIA weekly natural gas report
Friday, Aug 2
Baker Hughes weekly rig count.
Precious Metals Review
Until Friday, gold bulls were wagering that they had little to lose on their bets for a Fed rate cut, to the extend that a better-than-expected Q2 GDP didn’t dissuade those who built long positions in the yellow metal in anticipation of the first U.S. monetary easing in a decade.
Spot gold, reflective of trades in bullion, printed a final trade of $1,418.52 on Friday, according to data, settling up $4.26, or 0.3%, on the day.
Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $4.60, or 0.3%, at $1,419.30.
For the week though, spot gold dropped by 0.4% while Comex futures slid by 0.5%.
Those losses came after gold suffered its sharpest one-day slide in three weeks on Thursday when the European Central Bank decided to hold on to rates instead of adopting a cut as some expected.
Then, the U.S. Commerce Department reported on Friday that gross domestic product growth expanded at a 2.1% annualized rate in the second quarter, higher than the forecast 1.8%.
Until the release of the GDP data, markets had fully priced in expectations that the Fed will cut interest rates by 25 basis points on July 31, although speculation has been fluctuating over a more aggressive 50-bp cut. After the release of the GDP data, those odds fell to 19.4%, compared to 23.5% earlier.
Some analysts say that more important than what happens next Wednesday is what the market expects of the Fed in follow-through action in September and beyond. Here’s where the real disappointment could be for gold longs, as the Fed might not deliver on the multiple interest rate cuts expected in the coming months.
“Inflation is not nearly as weak as the market expects,” Blackstone’s chief investment strategist Joseph Zidle said in an interview with CNBC earlier this week.
“A lot of the cuts that the market demands from the Fed were based on this really weak inflation expectation,” Zidle said. “Economic growth is slowing, but I think we’re going to avoid a recession for a long time.”
Precious Metals Calendar Ahead
Tuesday, July 30
Japan Bank of Japan rate decision
Germany Prelim CPI
U.S. Core PCE Price Index
U.S. Personal Spending
U.S. CB Consumer Confidence
U.S. Pending Home Sales
Wednesday, July 31
China Manufacturing and Non-Manufacturing PMIs
Euro zone Premin flash GDP
Euro zone CPI flash estimate
U.S. ADP) nonfarm payrolls
U.S. Chicago PMI
U.S. Federal Reserve rate decision
Thursday, August 1
China Caixin manufacturing PMI
U.K. Bank of England rate decision
U.S. Initial jobless claims
U.S. ISM manufacturing PMI
Friday, August 2
U.S. Trade balance
U.S. Nonfarm Payrolls