Commodities Week Ahead: Saudi Price Hike Could Keep Oil Up; Gold Eyes CPI 

Saudi Arabia’s gambit of striking while the iron’s hot could pay off again for oil bulls as the kingdom raised prices from February for all crude grades it sells to Asia in March.

Longs in gold, meanwhile, will be warily watching latest US inflation data on Thursday via the Consumer Price Index reading for January, which has all indications of matching or exceeding the near 40-year highs set in December.

Crude markets opened the new week’s trade lower in Asia in a widely-expected consolidation after last week’s 6% jump that added to buying mania in oil that has lasted seven weeks now. 

But before the correction—if it could even be called that—found its legs, the Saudis announced pricier barrels to Asia from their Aramco exporting facilities, ensuring that $90 and above for crude will likely stay. 

Last week’s run-up in oil was triggered by fears that the Permian oil-and-gas basin could get frozen up again like last year if super-cold temperatures hit Texas as forecast.

The stakes of another super freeze are high in Texas, where last year’s winter storm led to blackouts and deaths of more than 200 people. 

Texas Thawing But Oil Barely Falling, Thanks To Saudi Maneuver /h2

But Texas had begun thawing from the worst of the week’s cold by Thursday, and as crude oil futures opened Friday’s session in Asia, it was clear the Permian wasn’t in such bad trouble.

Utility officials in Texas are also confident the Lone Star State’s power grid will avoid a repeat of last year’s blackouts from storms sweeping through the region. Since the 2021 catastrophe, new rules have been put in place requiring grid operators to increase reserve capacity and make it easier for industrial users to get paid to reduce consumption. 

Yet oil, in the true nature of an unhinged rally, continued rising like it had in recent weeks chasing geopolitical risk from the Russia-Ukraine conflict—despite not a barrel of crude being impacted by that, or a single rocket fired in the showdown.

In an indication of how misguided the weather bet may be—at least in the near-term—natural gas plunged 18% between Thursday and Friday, giving back all of Tuesday’s 16% rally, after it became apparent that the fear factor over the Permian had been overplayed.  

Gas is used for heating and cooling and is as important as oil (or maybe more) during the peak winter heating period. As of last week, gas supplies were at a greater risk of being run down in the near term than oil, with the five-year average for storage nearly 15% below where it stood a year ago, data showed.

Texas was getting warmer on Monday after last week’s cold. But the market had already moved on past the Permian concerns to focus on the Saudi price hikes.

Traders are buying into the “reflection of the Saudi belief that rising demand will not be reversing any time soon and that the 400K bbl/day increases each month are well-calibrated (even though some producers are unable to meet expanded quotas),” said Eamonn Sheridan, a markets analyst on the ForexLive forum.

New York-traded West Texas Intermediate crude fell almost $1 to an intraday low of $91.31 before recovering to hover at almost $92 by midnight Monday in New York.

On Friday, WTI settled up $2.04, or 2.3%, at $92.31 per barrel, after a session high at $93.17. It had risen 30% over seven weeks, with the rally beginning just before the Christmas week. For this year, WTI is up 23%. 

London-traded Brent, the global benchmark for oil, was 25 cents, or 0.3%, higher at $93.52.

Brent settled up $2.16, or 2.4%, at $93.27 on Friday, netting 27% over a seven-week period. Year-to-date, it has gained 20%. 

Gold Still Moving In A Measured Dance/h2

In gold’s case, Monday’s trade was no different from Friday’s: a measured dance of two steps forward and one behind that defined the yellow metal’s behavior since its return to $1,800 pricing, surviving the onslaught of a powerful US jobs report for January.

Gold futures’ most active contract on New York’s COMEX, April, was up $1.85, or 0.1%, at $1,809.65. On Friday, it settled up $3.70, or 0.2%, at $1,807.80 an ounce, rising 1.3% for last week.

While a weekly gain north of 1% isn’t bad for any market, in gold’s case it’s a painful reminder to bulls in the market of how underplayed the commodity is as an inflation hedge, when key price indicators in the US are all pointing at 40-year highs.

“The $1,800 level is key for gold and if gold can continue to hover around it, that would be very positive for bullion bulls,” Ed Moya, analyst at online trading platform OANDA, wrote in his weekly commentary. Adding:

“If gold breaks below $1,780, conditions could get treacherous and prices could see significant momentum-selling targets towards $1,700.”

Following the jobs report, Fed funds futures suggested there could be as many as five interest rate hikes this year as the extraordinary labor market conditions create a solid base for the Federal Reserve to fight inflation.

“The US jobs report has the market now pricing in a greater than 50% chance that the Fed will hike five times in 2022,” economist Greg Michalowski said in a post on the ForexLive financial media platform.

“Expectations for March and May hike are now at 100%. There is an 82% chance of a June hike and a 56% chance of a July and November hike.”

The quantum for each hike remains at 25 basis points. Rates are currently at between zero and 0.25%, and the five hikes could bring them to a range of 1.25%-1.50% although some hikes could be more than 25 basis points, depending on the performance of the labor market, the economy and, ultimately, inflation.

After staggering unemployment triggered by the COVID-19 outbreak in 2020, the labor market has picked up dynamically, showing a jobless rate of just 4.0% in the January nonfarm payrolls report released on Friday—versus a record high of 14.8% in April 2020. An unemployment rate of 4.0% or lower is considered as “maximum employment” by the Fed, which has a dual mandate of growing jobs and keeping inflation under control primarily through interest rate controls.

Since slashing rates to nearly zero in March 2020, the Fed has provided stimulus of more than $2 trillion over the past 20 months to sustain credit markets. On top of that, the federal government spent trillions of dollars more on pandemic relief measures, while employers paid out higher wages to working Americans.

All that money, along with supply chain bottlenecks arising from the pandemic, has created soaring inflation. The economy grew 5.8% last year from a 3.5% contraction in 2020. But the Consumer Price Index jumped 7% in the year to December, growing at its fastest since 1982. It’ll be interesting to see where the index stands for January (forecasts pointing at an annual rise of 7.3% for this month). The Fed’s own tolerance for inflation is a mere 2% a year.

Following the January jobs report, expectations had been heavy for gold to correct from $1,800 to $1,797 and even test $1,790, said Sunil Kumar Dixit, chief technical strategist at skcharting.com. 

But gold didn’t do that.

“Gold, in fact, surprised by rebounding to above $1,800,” said Dixit. Adding:

“If it succeeds holding above $1,785 in any volatility that comes this week, then the rebound could extend to $1,825, a level which is critical for further upside.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

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Written By: Investing.com