Energy & Precious Metals - Weekly Review and Outlook

By Barani Krishnan

Investing.com - Is the U.S. job market really a friend of the oil bull?

We’ll know in the coming days, as speakers from the Federal Reserve react to July’s non-farm payrolls that showed a job creation more than twice the level forecast by economists.

Not too long ago, oil bulls used to beam at the U.S. labor market with pride. And there was reason to: The nexus between oil prices and job numbers in the United States is that x amount of fuel is needed for x number of people to commute or get around. Simply put, the bigger the job creation, the greater the oil demand.

While that still holds true, a new dynamic has surfaced, making that relationship more complicated. Bigger job numbers are now bringing along greater wage pressures. This results in sharper inflation and, consequently, higher interest rates from the Fed.

For what it’s worth, crude prices still rose from Friday’s lows to settle in the positive after the release of the July non-farm payrolls, with dip-buying emerging in oil after a cumulative drop of more than 6% in just two days of trading.

But oil’s performance remained dismal for the week, with Brent, the London-traded global benchmark for crude, finishing below $100 a barrel and posting a near 14% drop. That was Brent’s worst weekly loss since the COVID-19 outbreak of April 2020 that virtually destroyed energy demand.

Brent aside, U.S. West Texas Intermediate oil, which serves as the benchmark for U.S. crude, fell about 10% on the week, after hitting a six-month low of $87.03 per barrel.

Charts show WTI risks falling to as low as $82, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Going into next week, if weakness persists below $88.50, we expect a quick retest of the $87 low, which may be closely followed by an extended drop to the $85-$82 support cluster,” said Dixit.

Some even think there’s a chance of WTI breaking below $80.

“It all depends on the temperature that Fed officials set for September rates in their speaking engagements next week,” said John Kilduff, partner at energy hedge fund Again Capital.

That’s why oil bulls aren’t sure anymore if they should celebrate these sorts of epic job reports.

“Good news is certainly bad news here,” economist Adam Button said, referring to the July nonfarm payrolls.

The Fed has already hiked interest rates four times since March, bringing key lending rates from nearly zero to as high as 2.5%. It has another three meetings left before the year is over, with the first of those on Sept. 21.

Until the release of the July non-farm payrolls, the consensus among money market traders was for a 50-basis point hike next month. As of Friday though, there was a 62% chance that the September rate hike will be 75 basis points - the same as in June and July, which incidentally was the highest in 28 years.

U.S. hourly wages - an indication of wage pressure - have risen month after month since April 2021, expanding by a cumulative 6.7% over the past 16 months, or an average of 0.4% a month. Inflation, measured by the Consumer Price Index, meanwhile rose by 9.1% in the year to June, the highest since the 1980s. The Fed’s target for inflation, meanwhile, is 2% per year, some 4-1/2 times less than the CPI reading.

Still, there may be a concession we’re missing here. Pump prices of U.S. gasoline - a major component of domestic inflation - have fallen from June record highs of $5 a gallon to under $4 now. That could take some heat off the CPI when the July update of the inflation report is released on Wednesday.

The real problem for oil bulls - like what Again Capital’s Kilduff says - may be what’s running in Fed officials’ minds.

“Before this jobs data, the chance for a 100-basis point hike looked completely remote,” said Kilduff. But if Fed officials feel that’s the strong medicine needed to curb inflation - again based on what the July CPI report reveals on Wednesday - “I wouldn’t say it’s that outlandish anymore,” Kilduff added.

Fed officials have time on their side. For the first time since April, the central bank will have two non-farm payrolls reports to digest - with the next coming on Sept 2. - before the rate decision on Sept. 21. The Fed will also have its Aug. 25-27 Jackson Hole symposium in Wyoming to debate at length on what to do with inflation and the economy.

The last time a discussion about a 100-basis point rate hike came up a few weeks back, it dissipated within 24 hours, with even the most hawkish Fed officials saying it would be excessive in an economy that had just posted two straight quarters of negative growth - which fulfilled the textbook definition of a recession. In all likelihood, the number of supporters for a full percentage point hike might still be few after the next CPI report.

But unyielding inflation could also enliven the Fed chatter on what to do next. Such talk could sharply boost the U.S. dollar and Treasury bond yields - ostensibly the biggest beneficiaries of any Fed rate increase - and pose more headwinds for oil and other dollar-denominated commodities.

On Friday, the Dollar Index which pits the greenback against six majors led by the euro, hit a one-week high of 106.81. The benchmark 10-year Treasury note for yields hit a two-week high of 2.87%.

Oil bulls also have another problem between now and the September rate decision: the end of the peak U.S. summer driving season, which typically brings a lower demand period for oil.

Gasoline stockpiles jumped thrice in the last four weeks and could continue rising in the coming weeks as American parents take fewer road trips and prepare instead for the new school and college year beginning from mid-August to early September.

Oil: Market Settlements and Activity

WTI settled below the key $90 per barrel level, though in the positive. WTI’s last trade was $88.53. It officially settled the session at $89.01, up 47 cents, or 0.5%. It hit a six-month low of $87.03 earlier, a bottom not seen since Feb. 1, when it went to as low as 86.55.

Until Friday, WTI had not forayed below $90 after the Russian invasion of Ukraine that saw a litany of sanctions imposed on Russian energy exports, sending a barrel of U.S. crude to as high as $130 by March 7.

With the reversal in its fortunes, WTI finished the first week of August down 10%, after a 7% monthly drop for June and July.

Brent settled just under $95, a level it had not visited since the Ukraine invasion that sent it to almost $140 on March 7.

Brent’s last print on Friday was $94.66, after it officially settled the session at $94.92, up 80 cents, or 0.9%.

For the opening week of August, it lost 13.7%, after conceding more than 4% for all of July and over 6% through June. That made it Brent’s biggest weekly drop since the week ended April 17, 2020, when it tumbled almost 24%.

Oil Price Outlook: WTI Technicals

SKCharting’s Dixit said trade above $96.60 could change WTI’s short-term momentum and set it up for a rally towards $99 and $101.

He said the daily stochastics reading of 11/6 for the U.S. crude benchmark has initiated a positive crossover that called for a short-term rebound towards the 50-week Exponential Moving Average of $92.93 and the 200-Day Simple Moving Average of $95.25.

“The $96.60 itself will be a 50% Fibonacci retracement from the previous $62 low to the March high of $130,” said Dixit. “But remember that to get to above $96, WTI has to climb $9 in all from Friday’s lows.”

He said the previous week's $101 high for WTI failed to attract buyers in the wake of recession fears, lack of demand enthusiasm and surprise builds in U.S. crude stockpiles. “The current price action is may likely to continue traveling south, toward the support cluster of $88-$85-$82.”

Gold: Market Settlements and Activity

Gold’s performance in the aftermath of the July nonfarm payrolls report suggested that longs in the game might not get crushed yet.

Gold, which typically encounters a meltdown in any situation that calls for stiff Fed rate hikes, logged a modest loss of just under 1% despite the consensus for a 75-basis point rate hike in September.

Gold probably survived the jobs report because neither the U.S. dollar nor Treasury bond yields - which together are the biggest beneficiaries of any Fed rate hike - rallied too much on Friday. As cited above, the Dollar Index hit a one-week high while Treasuries yields rose to a two-week peak.

“The next couple of weeks will truly test if gold is a safe-haven again,” said Ed Moya, analyst at online trading platform OANDA. “Bullion traders now have two big questions: How much higher will the Fed take rates? Can gold rally alongside a strengthening dollar?”

After tumbling to an intraday low of $1,780.30 an ounce - which was still higher than Thursday’s bottom - the benchmark gold futures contract on New York’s Comex, December, did a final trade of $1,792.40. It earlier settled the session at $1,780.50, down $15.70, or 0.9%. For the week, Comex gold was basically flat, settling in positive territory for a third straight week.

The spot price of bullion, more closely followed than futures by some traders, did a final trade of $1,774.95. down $16.38, or 0.9%, on the day.

Gold: Price Outlook

SKCharting’s Dixit said for gold to continue its positive trajectory for a fourth week running, prices need to hold above $1,762 and the swing low of $1,754.

He said spot gold’s weekly stochastic reading of 40/29 supports a continuation of the bullish rebound, which aims at the 50-week Exponential Moving Average of $1,828 and the 100-Week Simple Moving Average of $1,830.

“The rally though has potential to extend to the 200-Day SMA of $1,842 and the 100-Day SMA of $1,845.”

But the trend could easily slip too, if exhaustion sets up to the upside, as nominal as gains have been the past three weeks, Dixit said.

“Though the broad outlook for spot gold favors long positions above the $1,724 support with targets for $1,835 - $1845, a maiden correction and consolidation towards $1,738 - $1,724 is a possibility.”

He explained that due to a negative crossover in spot gold’s daily stochastics reading of 81/85, a minor correction towards $1,738 - $1,724 could start if prices make a sustained break below $1,762 - $1,754.

“A sustained break below $1,762 and $1,754 could put the brakes on the upside and trigger a minor bearish correction to $1,738 and $,1724, which would mark the 50% and 61.8% Fibonacci retracement levels, respectively, of the runup from $1,681 to $1,775.”

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

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