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Energy & Precious Metals – Weekly Review and Outlook

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© Reuters.

By Barani Krishnan

Investing.com — Two presidents are taking on very audacious gambles: Vladimir Putin wants Europe to pay for Russia’s gas in rubles while Joe Biden hopes to provide enough barrels of oil at home to stop crude and gasoline prices from going higher. 

It’s interesting to see how far both will get.

In Putin’s case, his “pay-in-rubles-or-no-gas” threat comes after the end of the peak winter demand for heating, raising questions of how desperate European buyers could be to comply with his demand.

With spring is progress and summer to follow Moscow could be the one feeling a little hot under the collar here.

Gas is a big foreign exchange earner for the Kremlin. 

In the first nine months of 2021, the latest data available from Russian gas producer Gazprom (MCX:GAZP) show revenue from sales to Europe, Turkey and China was 2.5 trillion rubles ($31 billion) from exporting 176 billion cubic meters of gas between January and September.

Should the European Union refuse to play ball with Putin – there are already enough protests to show they won’t – the standoff could drag until meaningful cold returns in late autumn for Europe to feel distressed enough to consider a deal or compromise with Moscow. That could be in November. And if Putin digs his heels in, it could mean seven months of no gas sales to Europe until then. 

In that time, Russia might be forced to pump its gas into domestic storage sites that can hold around 72 bcm. Gazprom-owned storage sites in Europe could hold another 9 bcm.

Gazprom expects domestic gas demand to increase to 260 bcm by 2026 from 238 bcm in 2020 and has plans to expand storage.

In the short term, if European gas is redirected to existing storage, it would be full in three to four months and some gas production could then be shut down, damaging long-term growth, analysts said.

“For Russia, a decision to restrict supply would be like shooting itself in the foot,” analysts at SEB Research said.

Also, the EU has rules covering measures to prevent and respond to disruption to gas supplies, Reuters reports.

The regulation identifies three levels of crisis: an early warning, an alert, and an emergency. EU countries are required to have plans in place for how they would manage the impact of a supply disruption at the three crisis levels.

In an emergency, European governments can intervene only if market-based measures are insufficient to ensure supplies to households and to customers providing essential services. Each country’s plan should define responsibilities for entities including industrial gas consumers at each crisis level, list actions to make gas available in an emergency, and a plan for how countries will cooperate.

The EU regulation requires member states to support another EU country their gas infrastructure connects to if that country requests assistance because it cannot supply enough gas to its households and essential social services.

Apart from trying to get more in an already stretched global gas market, several European countries have also said they will have to use more coal, potentially extend the life of nuclear plants and increase renewables output.

Many, however, doubt that the gas-price standoff will last for seven months as European businesses and households can ill-afford to let prices for the commodity go any higher. Already, the spot market for gas in the EU is up 500% from a year ago. Russia provided 155 billion cubic meters of gas to Europe last year, or a third of the bloc’s supply.

U.S. LNG exporters have already emerged as big winners of Europe’s supply crisis, while Norway has also benefited. Last week, the United States said it will work to supply 15 bcm of LNG to the European Union this year but this would not fully replace what Russia sends to Europe via pipelines.

Gas in European storage might be enough for spring and summer without demand curtailment, but Europe will risk entering next winter with only around 10% of gas in store by the end of October without some energy conservation measures, said Kateryna Filippenko, principal analyst at Wood Mackenzie.

To attract more LNG from elsewhere, European wholesale gas prices would need to remain higher than the Asian benchmark LNG price. Rocketing gas prices are already hurting consumers and industries and governments have spent billions of euros on measures to try and shield them.

“We have to be aware that the companies who have signed long-term contracts with Gazprom do receive gas at significantly lower prices than we have to pay in the LNG market. So there will be impact on our energy prices,” EU energy commissioner Kadri Simson told EU lawmakers last month.

Lastly, the ruble, which was in freefall in the first two weeks of the Ukraine invasion, has found a floor, not so much because of traders’ optimism in the Russian economy but more due to extraordinary efforts by Moscow’s central bank to prop it back up. The steps taken for this include barring commercial banks from selling dollars to customers, prohibiting Russian brokerage firms from letting foreign clients sell securities and limiting how many dollars Russians can withdraw from their bank accounts.

Aside from the efforts of its central bank, Moscow is also earning steadily from oil and gas exports. One reason for that, of course, is that the sanctions themselves weren’t designed to hurt Russia’s energy sales, given how Europe is dependent on these. Whoever isn’t taking Russian oil and gas now is doing it at their own will, either in sympathy with Ukraine or in fear of political repercussions. India is one notable exception to this.

The U.S. and EU know the only way they can starve Russia of cash to fund its war against Ukraine is to fine-tune their existing sanctions on Moscow and come up with new, more effective ones. In principle, the White House and its allies need to prevent Russia from purchasing the military equipment it needs to continue the war, Deputy U.S. Treasury Secretary Wally Adeyemo said. 

Back home, Biden, interestingly, has found support among rival Republican lawmakers to add to the sanctions on Russia. But the president is a little hesitant to embrace that support, wondering if it’s a ploy by his rivals to push him further down the political sinkhole ahead of November’s midterm election. 

On the oil front, Biden announced on Thursday that his administration will release a record of 1.0 million barrels per day of oil from the U.S. Strategic Petroleum Reserve over the next six months to alleviate a global supply crunch. The president’s biggest problem here might still be OPEC, or the Organization of the Petroleum Exporting Countries, and its allies, who, when combined, are known as OPEC+. 

The Saudi-controlled and Russia-steered OPEC+ has no intention of letting the oil market be adequately supplied, where every required barrel becomes available, a hypothetical situation that could result in crude being priced at $50 per barrel rather than $100. I say hypothetical because even if it wished, OPEC+ can’t fill up the market anyway, not with the gaping 3-million-barrels-per-day hole blown by the West’s sanctions on Russia.

Analysts across the energy sector warn of a worsening supply crunch in the coming months as the United States upholds its ban of Russian oil, while many other nations avoid business with Russia as well, due to sanctions imposed against Moscow over its so-called military operation in Ukraine.

Despite such warnings, OPEC+ decided on Thursday to do just a modest production increase of 432,000 bpd May onwards. That’s a slight uptick from its typical monthly increment of 400,000 barrels per day in a market analysts said was in need of around 5 million barrels more.

OPEC+ also said on Thursday that the recent volatility in oil prices was “not caused by fundamentals, but by ongoing geopolitical developments”, in an apparent reference to the war in Ukraine. Brent hit 14-year highs of almost $140 per barrel in the aftermath of the sanctions imposed on Russia and has largely held at above $100 over the past month.

Amos Hochstein, special envoy for international energy affairs in the Biden administration, said the 180-million barrel release from the SPR was just the beginning of more supply that will come on board.

But energy market analysts appeared skeptical of the plan’s success.

“The knee-jerk selloff from the SPR announcement of the release of 1-million barrels a day from the SPR over the next six months won’t have a lasting impact on oil prices, so if geopolitical risks continue to intensify, oil will recover most of this week’s losses,” said Ed Moya, analyst at online trading platform OANDA.

Biden ordered the release of 50 million barrels from the SPR in November and 30 million in March, in coordination with the reserves release of other countries like China, Japan, India, South Korea and Britain.

The SPR had 568.3 million barrels in stock as of the week ended March 25, according to the U.S. Energy Information Administration. With 180 million barrels drawn down over six months, the reserve could be down to a third of its current size.

Biden began tapping the SPR last year to provide U.S. refiners with oil loaned from the reserve that they wouldn’t have to pay for but return with a slight premium and within a stipulated period. By doing this, the administration hoped there will be fewer transactions of oil in the open market and prices for both crude and fuel products like gasoline and diesel would come down.

In recent weeks, the administration has released some 3.0 million barrels weekly from the SPR. But the government’s efforts have had a negligible effect so far on prices, with refiners turning out more products than they usually do at this time of year. That has resulted in an extraordinarily high turnover of barrels that has kept prices little changed on both the crude and oil products fronts.

To conclude, two of the world’s most powerful men, by virtue of their office and the massive resources they hold, are bent on bending the market their way. History will show how successful their actions are. 

Oil: Weekly Settlements & WTI Technical Outlook

London-traded Brent, the global oil benchmark, settled down 36 cents, or 0.3%, at $104.35 per barrel after a session low at $102.37. Week-to-date, Brent was down 13%, its biggest weekly decline since April 2020. Just on Thursday, Brent finished the first quarter up 39%.

New York-traded U.S. crude benchmark West Texas Intermediate, or WTI, settled below key $100-per-barrel support. WTI fell $0.90, or 0.9%, to finish at $99.38, after an intraday low of $97.81. WTI was also down almost 13% on the week for its biggest weekly drop since April 2020. On Thursday, it settled first quarter trading up 33%.

Though WTI’s primary trend remains bullish, its bearish weekly close has taken some of the gloss off the U.S. crude benchmark, said Sunil Kumar Dixit, chief technical strategist at skcharting.com. 

“For the week ahead, we see WTI support at $96.45 and resistance at $108.45,” said Dixit. “A sustained move above $101.45 should attract buyers for targets of $104 – $106 – $109. Strong affirmation of this can even extend buying to $111.50 – $113 and $117.”

On the flip side, rejection at $101.45 – $106 can trigger selling pressure to bring WTI down to support areas of $98 – $93.

“A mid-trend could take the bearish charge to below $92, exposing WTI to $88 – $80,” Dixit added.

Gold: Weekly Market Activity 

Gold began April trading with a fairly large slide on the week as the U.S. unemployment rate fell despite an underwhelming monthly addition in jobs that suggested the economy might not fare too badly. That suggested investors may rely less on safe havens like gold, going forward.

The front-month gold futures contract on New York’s Comex settled down $25.35, or 1.3%, at $1,923.85 an ounce. For the week, it fell 1.8%, its second biggest weekly decline in three that contrasted with its first quarter gain of 6.6% for second quarter trading that ended on Thursday.

Gold typically serves as a hedge against economic and political troubles. In March, Comex’s front-month contract got to as high as $2,070 – just $42 from rewriting below the August 2020 record high of $2,121 – amid turbocharged U.S. inflation and a bubbling of geopolitical tensions right after Russia’s invasion of Ukraine.

On Friday though, gold fell as the U.S. jobless rate improved to 3.6% in March from 3.8% in February despite jobs growth for the month coming in at 431,000 –  some 12% below economists’ expectations. 

A jobless rate of 4% and below is defined by the Federal Reserve as “full employment”. The United States has technically had full employment since December when the jobless rate fell to 3.9%.

“A strong employment report has gold on the ropes even as the Treasury yield curve inverts again,” Ed Moya, analyst at online trading platform OANDA, said, as the yield on the U.S. 10-year Treasury note jumped for the first time in six days.

“The shorter-end of the (yield) curve is steepening and while recession risks for down the road are growing, the economy is still looking very good right now,” Moya said. “Gold seems like it could still trade between the $1,900 and $1,950 range, but the risks of bearish momentum winning out are growing.“

The monthly growth or decline in jobs is being closely watched by the Fed to decide on the rate hikes that will be needed to contain inflation expanding faster than an economy growing at its quickest pace in four decades. 

After contracting 3.5% in 2020 from disruptions forced by COVID-19, the US economy expanded by 5.7% in  2021, growing at its fastest pace since 1982.

But inflation grew even more. The Personal Consumption Expenditure Index, a U.S. inflation indicator closely followed by the Fed, rose by 5.8% in the year to December and 6.4% in the 12 months to February, Both readings also indicated the fastest growth since 1982. The Fed’s own tolerance for inflation is a mere 2% per year.

The central bank slashed rates to nearly zero after the coronavirus outbreak in March 2020 and kept them unchanged for two years to enable economic recovery.  Last month, for the first time since the pandemic, the Fed’s policy-making Federal Open Market Committee, or FOMC, raised rates by 25 basis points, or a quarter percentage point.

Now, unyielding inflation is prodding FOMC officials to consider a 50-basis point, or half percentage point, increase at the committee’s next two meetings in May and June. The central bank has stated that it could raise rates by a maximum seven times this year and continue its monetary tightening into 2023 to bring inflation back to its 2%-per year target.

Fed Chairman Jerome Powell said last month the labor market was “extremely tight” with robust demand and subdued supply. He also noted that more than a million positions were filled within the first two months of the year.

The government’s monthly Job Openings And Labor Turnover Summary report earlier this week showed that job openings hovered near record highs in February as vacancies continued to outpace hires in an unemployment market that remained overwhelmingly in favor of workers. 

Gold: Technical Outlook

Like WTI, gold’s primary trend was bullish and longs are likely to keep adding to their positions with each major dip, said skcharting’s Dixit.

He noted that week-long bearish momentum capped gold at below $1,960 and tested the nerves of longs at $1,890, only to see the week settle at $1,924.

“For the week ahead, gold’s price blueprint is interestingly volatile,” he said. “A reliable Ichimoku leading and lagging analysis indicates possible limited downside to $1,888 – $1,877, which may even extend to $1873.”

Dixit said he expected strong buying to emerge at the test of value area, which has often acted as demand zone. 

“Robust buying from these areas is likely to take gold higher to $1,928 – $1,958 – $1,980 – $2010,” he said. “On the flip side, if gold fails to attract buyers at $1,888 – $,1873 area, expect a deeper correction to $,1850 – $1,820.

Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.

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