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It was a bearish week for the two major commodities in the world as sentiments of the U.S. Federal Reserve interest rate hike and the actions of the Organization of Petroleum Exporting Countries and its allies (OPEC+), becomes the market focus.
Crude prices had their first weekly decline in five weeks as persistent U.S. rate hikes and recession fears ended a rally in place since the 13-member Saudi-led Organization (OPEC+) steered by Russia devised an output maneuver to rescue the market from 15-month lows. The price move in the just-ended week wasn’t too large, with the drop being less than 6%, versus the four previous weeks where the U.S. benchmark, the West Texas Intermediate (WTI) rallied a total of 24%, and the global benchmark, the Brent, gained 18%.
The most-active gold futures contract on New York’s Comex settled Friday’s trade down 1.4%, to currently stand at $1,990.50. Since the precious metal rallied to a more than three-year high of $2,048.60 on April 13, Comex’s most-active gold contract has lost almost 3%. For the current week, it was down 0.6%, after last week’s slide of 0.5%. The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, ended down by 1.1%, currently trading at $1,983.64. For the week, it was also down 1%.
What You Should Know
The decline in the prices in the oil market is attributed to persistent U.S. rate hikes and recession fears, which have ended a rally that had been in place since OPEC+ devised an output strategy to rescue the market from 15-month lows.
The WTI traded below $80 a barrel. Technical analysts predict that the WTI could drop to mid-$70 in the coming week, which could be another bearish week for oil before the U.S. Federal Reserve’s rate decision on May 3. If WTI drops to $75 or below, Brent, which usually trades at a $5 premium to the U.S. benchmark, risks dipping beneath the $80 mark too. This could again raise the ire of OPEC+.
While the G7’s $60 per barrel cap on Urals crude is described as annoying to Vladimir Putin, the powers within the Kremlin are realistic about what they’re up against, which are an entire global network of oil shippers, tanker insurers, issuers of letters of credit (i.e. banks) and other service providers who have no choice but to follow the dictates of the U.S. Treasury, or be sanctioned themselves. As such, Moscow is content to supply as many barrels as necessary to willing customers (India and China) at prices that work for both buyers/sellers.
The West’s sanctions against Russia have turned out to be manna from heaven for Indian oil importers and refiners, who imported record numbers of barrels from Russia at fire-sale prices, which they have in turn, rebranded as Indian oil and resold at a premium. The buyers included some of the same G7 nations, which knew only too well what was going on.
It is believed that the main reason OPEC+ went down the path of a second production cut announcement in four months was to fulfill the Saudi need for $80 or more oil, which some say is critical to financing the redevelopment plan called Vision 2030. This plan is centered around a futuristic work-play-and-live hub called Neom, which is today high in grandiosity and low in delivery. Analysts say that Saudi Arabia’s Crown Prince Mohamed bin Salman expects the rest of the world to pay for that through the Saudi hegemony of OPEC+.
While OPEC+ may be concerned about falling oil prices, some analysts believe that they are unlikely to take significant action unless prices fall much further. Others believe that OPEC+ may need to consider further production cuts or other measures to support prices. Ultimately, the future of the oil market depends on a variety of factors, including global economic growth, geopolitical tensions, and the pace of technological change in the energy industry.
For Gold, the latest weekly decline in gold began after the Dollar Index and U.S. Treasury yields rebounded from one-year lows hit last week. Gold is a direct contrarian trade to the dollar. Besides that, a higher dollar tends to weigh on overseas demand for commodities priced in the currency. Higher Treasury yields also sap the appeal of risk-heavy assets, while also limiting flows of foreign capital into the United States.
Still, weighing on gold were concerns that the Federal Reserve will agree on another quarter-point increase at its May 3rd rate decision which will bring U.S. interest rates to a peak of 5.25%, versus the pandemic-era rate of just 0.25%.
OANDA’s analyst Erlam, explained, “Gold remains choppy as we near the end of the week. Uncertainty over the path of interest rates, which should become much clearer over the next month or two, is driving the indecision we’re seeing in gold at the moment.” While Erlam noted that higher Treasury yields had stalled the rally in the yellow metal, he also stated that, “traders are clearly in no mood to give up on the yellow metal. As things stand, dips are being bought and it will be interesting to see if we see the same on this occasion as well. Big support remains around $1,940-$1,960.”
Oil Outlook
According to Sunil Kumar Dixit, chief technical strategist at SKCharting.com, if oil bears attempt to force WTI to fill its April 3 gap of $75.67, Friday’s settlement of $77.87 for the June contract will first be dragged down to $77 and then be set up for a retest of the $75.80 support. He explained, “After four weeks of strong positive action, WTI has fallen almost 6% for the first time in a week. The weekly stochastics at 69/84 makes a negative overlap while RSI at 48 is positioned below the neutrality of 50. The major downside potential is seen at $73.80.” On the flip side, he said June WTI could move back towards $79.50, above which the 200-Day Simple Moving Average of $82.40 remains a strong resistance.”
Gold Outlook
Dixit of SKCharting said an upward rebound in gold will require a strong breakout above the 5-Day Exponential Moving Average, or EMA, of $1,996 and a horizontal resistance zone of $2,015 to retest the swing high of $2,048. He explained, “Going forward into the week ahead, if the Dollar Index breaks and sustains above 109.95 basis points, we are likely to witness the dollar gaining further upside towards the weekly Middle Bollinger Band of $103.10, followed by the 50-week EMA of $103.65. This may push gold lower toward the Fibonacci level of $1,955. In the event of any extended weakness, gold could even get to the 50-day EMA of $1,943.
