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Sunday, December 8, 2019

Energy & Precious Metals - Weekly Review and Calendar Ahead

© Reuters.  © Reuters.

By Barani Krishnan

Investing.com - Has Christmas come early for the oil bull? Perhaps.

After Friday’s Saudi “put” of 400,000-barrels-per day, on top of the 1.7 million bpd in cuts that Russia and the rest of members and allies in OPEC agreed to, many could be thinking that Saint Nick made a pitstop in Vienna this week before his travels around the world.

In the financial world, a put is an instrument that gives the owner the right to sell an asset (the underlying), at a specified price (the strike), by a predetermined date (the expiry or maturity) to a given party (the seller of the put).

That’s essentially what Saudi Arabia promised in the Austrian capital during Friday’s meeting of the enlarged OPEC+, which groups the Riyadh-led Organization of Petroleum Exporting Countries with its ten allies — Russia, Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, South Sudan and Sudan.

In accordance with the terms of a put, the Saudis agreed to provide 400,000 bpd of their own cuts if OPEC+ averaged its part of 1.7 million bpd (the strike) through the first quarter of 2020 (the expiry or maturity).

Crude prices rocketed on the news. U.S. West Texas Intermediate jumped 7.3% on the week, finishing at $59.20 per barrel, after a session high at $59.84 per barrel, a little short of the $60 level much sought by oil bulls. It was WTI’s biggest weekly gain since mid-June.

U.K. Brent, the global benchmark for crude, settled up 3.1% on the week, at $64.39.

OPEC optimism aside, the week’s gains were shouldered by Wednesday’s rally after weekly U.S. energy data showing steep declines in crude stockpiles.

Year-to-date, WTI's gains are now just over 30%. Brent, meanwhile, shows an annual advance of just under 20%.

But will 2020 remain great for OPEC and its brethren?

That’s a big ask because more than the historically-poor compliance to OPEC accords shown by some members, lurking in the shadows of the oil market is its biggest wildcard ever: Donald Trump.

The U.S. president’s dislike for high fuel prices, especially in a year that he’ll be seeking reelection, might again pit oil producers against the might of the Oval Office under him, his Twitter account and a propensity for wanting to be proven right.

We’ll talk more about the Trump-versus-OPEC likelihood in the coming week. For now, suffice to say, the oil bull may have little resistance on its way up and $60 WTI may become a reality.

Among precious metals, gold fell to the wayside again Friday, after a lustrous performance midweek, as a supercharged U.S. jobs report saw drooling investors resume their chase for risk rewards against hedging with safe-havens. Auto-catalyst metal palladium, meanwhile, notched its tenth straight record-high on supply worries.

Energy Review

On record, this week was oil’s best since June.

Going forward, however, the new production cuts that OPEC promised the market cannot be realized without strict discipline from “serial-offenders” such as Iraq and Nigeria - and even Russia - in curtailing production.

Also, for the record, Russia got a free pass from OPEC+ in adding condensates to its production, technically allowing Moscow to add many more unaccounted barrels under the new output agreement.

“OPEC’s track record for cuts, sans the Saudis, is simply horrible,” John Kilduff, founding partner at New York energy hedge fund Again Capital, told Investing.com. “The group as a whole has never been very good in complying with production deals. I don't know why it would be any different this time around.”

“But there's a new sheriff in town in the form of the new Saudi oil minister, so we’ll see,” Kilduff said, referring to Prince Abdulaziz bin Salman, who took charge of Riyadh’s top energy job in September.

Iraq’s Oil Minister Thamir al-Ghadhban himself admitted on Wednesday that the country might have stuck to production of around 5 million bpd and beyond, versus its 4.51 million commitment, without prodding from the OPEC leadership. But Baghdad will strive to comply with its quota from here on, he pledged.

The new production deal announced by Prince Abdulaziz could also be counterproductive to OPEC if higher crude prices ultimately encourage more output from producers outside the cartel.

“Higher prices will prompt more competition to come in and it could be all non-OPEC oil, not just shale,” Kilduff said. “We know the U.S. drillers have been restrained for some time. But at the same time, there’s growing Brazilian and other output competing for more market share.”

U.S. oil output hit a record high of 12.9 million bpd in recent weeks - according to estimates by the Energy Information Administration - putting it at the top of world production. But the weekly U.S. oil rig count published by industry firm Baker Hughes shows a staggering drop in drilling activity – a sign of the amazing efficiency in shale crude production.

Energy Calendar Ahead

Monday, Dec 9

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Dec 10

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Dec 11

EIA weekly report on oil stockpiles

Thursday, Dec 12

EIA weekly natural gas report

Friday, Dec 13

Baker Hughes weekly rig count

Precious Metals Review

Gold has a new nemesis in the form of U.S. jobs numbers to beat it down, while palladium proves its record-making streak just cannot be stopped.

Stronger-than-expected non-farm payrolls for November spurred a new round of risk-taking on Wall Street on Friday, leaving gold floundering as investors saw fewer reasons for a safety hedge.

There was another factor working against the yellow metal: U.S. Labor Department data showing employers added 266,000 jobs in November - the fastest pace since 312,000 in January - is likely to encourage the Federal Reserve to keep interest rates on hold for longer. Weaker interest rates often prod investors to search for a better store of value than the dollar, and gold for years has been that alternative.

Gold futures for February delivery on New York’s COMEX settled down $18, or 1.2%, at $1,465.10 per ounce. It hit a four-week high of $1,487.65 on Wednesday as investors rushed to look for a hedge as after the Trump administration’s initial indications that the U.S.-China trade deal might be delayed beyond 2020.

Spot gold, which tracks live trades in bullion, was down $15.68, or 1.1%, at $1,459.92 by 2:45 PM ET (19:45 GMT). It reached a four-week peak of $1,481.90 on Wednesday.

For the week, COMEX gold fell 0.5% while the spot price lost 0.4%.

Palladium, the auto-catalyst metal in short supply, sustained a record-breaking spree in place since Nov 25.

The spot price of palladium was up $7.18, or 0.4%, at $1,879.18 after a record high at $1,882.15. It rose 2% on the week.

Palladium futures for March delivery on Comex settled up 40 cents at 1,846.10. There was no all-time high on the futures side.

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