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Energy & Precious Metals – Weekly Review and Outlook

© Reuters.

By Barani Krishnan

Investing.com — The Big V is back. And it stands for volatility. Commodities from crude oil to gas, gold, platinum, wheat, corn and soybeans saw violent price swings on Friday, barely 24 hours after hitting multi-year highs on Russia’s invasion of Ukraine. 

Concerns over supply triggered the moves both ways. Hours after the invasion, crude oil revisited 2014 highs of above $100 a barrel; Dutch natural gas futures rose as much as 62%, the most since at least 2005, gold hit one-year highs, just $25 short of cracking $2,000 an ounce; palladium rose to a seven-month peak of $2,700 an ounce; wheat hit 13-½ year highs of above $9.50 a bushel; soybeans went to 9-½ year peaks of above 17.50 a bushel and {8918|corn}} stormed to nine-month highs of nearly $7.20 a bushel.

All were driven by fears of supply disruptions from the war and from sanctions on Russian entities and individuals. The fears were more than justified: Russia is one of the world’s biggest oil and gas exporters and the largest producer of palladium. Both Russia and Ukraine are also major growers of wheat and corn. 

So real was the gravity of the crisis that Egyptian Prime Minister Mostafa Madbouly held a special cabinet session to discuss how the conflict might disrupt wheat and other bread flour supplies, and drive up prices in a country known to consume more bread than any other in the Middle East. Egyptians eat bread at twice the global average, importing more wheat than any other nation, with 85% of their purchases coming from Russia and Ukraine.

On Saturday, Western allies opposed to Moscow announced they would block “selected” Russian banks from the SWIFT international payments system, handing the Kremlin what might be the “mother of all financial sanctions”.

But there were also signs that some of the disruption fears were overblown, and that a handful of the US-Euro sanctions, including those on Russian President Vladimir Putin, were more symbolic than anything else – meaningless in producing any effective outcomes. 

When those realities set in, the raw materials that had seen shocking price gains after the Russian assault reversed as violently as they rose. Crude oil tumbled 12% from its post-invasion high before returning to the mid-$90s. Gold to palladium and wheat to corn saw huge swings as well.

“Investors are trying to assess how back-and-forth sanctions will weigh on risk appetite,” noted Ed Moya, analyst at online trading platform OANDA.  “Russia will also respond with their own set of sanctions against Western nations.  Hard-hitting sanctions could put the Russian economy on a terrible trajectory, but that pain would be shared with Europe, so it seems that might be a last resort.”  

Moya reasoned that kicking Russia out of the SWIFT system of international payments “would make it very hard for Europe to pay for its (own) energy and for many countries that need Russian wheat and other commodities that are vital to the semiconductor space.”

Bloomberg’s Javier Blas had a more detailed – and intriguing – take on it:

“In the 24 hours after Vladimir Putin signed a decree recognizing two breakaway Ukrainian territories, the European Union, the U.K., and the U.S. bought a combined 3.5 million barrels of Russian oil and refined products, worth more than $350 million at current prices. On top of that, the West probably bought another $250 million worth of Russian natural gas, plus tens of millions of dollars of aluminum, coal, nickel, titanium, gold and other commodities. In total, the bill likely topped $700 million.”

“And that’s the way it’s going to be – at least for now. The U.S. and its European allies will continue buying Russian natural resources and Moscow will continue shipping them, despite the biggest political crisis between the former Cold War warriors since the collapse of the Soviet Union in 1991.”

Blas said fears that the Kremlin would cut gas supplies to Europe remained just that: fears 

“Any military trouble remains confined to the two breakaway territories, which are far away from the mighty Russian oil and gas pipelines that crisscross Ukraine from East to West: Druzhba, Soyuz, Progress and Brotherhood,” Blas said, noting that the company that operates the gas pipeline network of Ukraine tweeted: “Keep Calm & Transit Gas.” 

He added that all sides in the Russia-Ukraine were aware of the contradictions that were going on. 

“The West knows that commodities are a cash cow for Putin, fueling his imperial ambitions thanks, in great part, to ultra-high oil and gas prices, but the allies are also aware of the economic self-harm of cutting imports to zero,” he said. “For its part, the Kremlin may be tempted to weaponize its natural resources – which could trigger blackouts in Europe. But it also knows commodity exports are its own economic lifeline.”

“It’s the commodities market version of the Cold War doctrine of mutual assured destruction, or MAD.”

Blas also notes that with other adversaries – say Iran or Venezuela – the White House has been quicker to use oil as a geopolitical tool. 

“As a result, both Tehran and Caracas cannot sell oil legally in world markets, not just into the U.S. However, Russia remains free to ship its oil into America; and the U.K. continues to buy Russian diesel, too.” 

Blas concludes by saying that “at this point, neither Moscow nor the U.S. and its allies have an economic, political or military interest in weaponizing oil, gas and other natural resources.” 

So, look out for more of the V in the coming week as markets try to separate the wheat from the chaff, so to speak.

Oil: Market Activity & Prices

Oil may have aced its long-awaited target to reach $100 a barrel but it seems to be having a harder time making an immediate return to the mark amid mixed readings on the war in Ukraine and its associated risks, including the ever-growing sanctions against Russian entities and individuals.

London-traded Brent, the global benchmark for oil, settled down $1.15, or 1.2%, at $97.93 a barrel on Friday. On Thursday, Brent reached $105.79, the first time it had gotten to $100 since 2014.

U.S. crude’s West Texas Intermediate, or WTI benchmark, settled down $1.22, or 1.3%, at $91.59. WTI hit a seven-year high of $100.54 in the previous session.

Despite the drop on the day, crude prices still registered weekly gains, with Brent up 4.3% and WTI rising 0.6%. Before last week, crude prices had gained non-stop for eight straight weeks.

Crude prices dropped on Friday after energy traders thought “the war in Ukraine probably won’t lead to any disruptions of Russian crude to Europe,” said Moya. He also cited the potential for talks between Moscow and Ukraine officials.

While that may be true on the day, the potential for further escalation in the conflict remained as Russian forces made their move toward the Ukrainian capital Kyiv.  

“Taking over Kyiv would be followed by a strong reaction from Western leaders, which should suggest all sanctions remain on the table, including those on Russia crude oil and gas,” added Moya. 

U.S. and EU officials also indicated on Friday that blocking Moscow from the international SWIFT payment system remained an option.

Ukraine’s Foreign Minister Dmytro Kuleba on Saturday called for a full isolation of Russia, including an embargo on the purchases of Russian crude.

Oil: Technical Outlook

A sustained move below $88.80 can extend U.S. crude’s correction to a cluster of support and to levels of $87.20 and $86.10, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“WTI’s weekly stochastic reading of 75/86 itself makes a negative crossover and the next leg down could be $80.70,” he said.

On the flip side, volume supported buying at above $91 can help U.S. crude retest $94 and make a second attempt at $100, Dixit said.

Gold: Market Activity & Prices

Gold’s dalliance with $1,900 peaks may not be over. But for this week itself, the market seems to have hit a crescendo with risk appetite overcoming safe haven trades on Friday to send U.S. stocks and bond yields higher and gold down for the first time in three days and for its first weekly decline in four.

Traders also appear to have grown somewhat weary in chasing bullion prices up on every Russia-Ukraine headline, explaining some of the deflation in the geopolitical pressure that sent gold to 13-month highs in the past two sessions.

“Gold prices are back below the $1900 level as risk appetite continues to stage a comeback despite a tremendous amount of uncertainty with the War in Ukraine,” said Moya, the analyst at OANDA.

“This week was quite the rollercoaster ride for gold prices and while it appears poised to finish the week slightly lower, the need for safe-havens still remains.”

Gold’s most-active contract on New York’s Comex, April, settled down $38.70, or 0.6% at $1,887.60 an ounce. On Thursday, the benchmark gold futures surged to a January 2021 high of $1,976.20. 

Aside from the drop on the day, the front-month in Comex gold also declined 0.6% on the week for its first weekly slide since Jan. 21, when it settled at $1,784.90.

Friday’s pivot in gold came as the yield on the 10-year Treasury note hit six-week highs just above 2%. Wall Street’s Dow, S&P 500 and Nasdaq indexes were all in the positive too, rising between 1% and 2%.

The slide also follows a historic plunge of nearly $100 intraday Thursday in a market that seemed to have everything bullish going for it: US inflation at 40-year highs; a Russia-West showdown unlikely to end anytime soon; and continued weakness in stocks that could divert more funds towards havens like gold.

“The very fact that amidst one of the worst geopolitical military crises, gold witnesses a $98 historic fall, raises questions on where gold is headed actually,” said Sunil Kumar Dixit, commodities strategist at skcharting.com.

To be sure, few think there’s lasting damage to gold’s upward momentum from this week’s move lower.

Goldman Sachs said on Thursday that the rally in gold could get to a new record high of $2,350, aided by demand for ETFs, on the back of the situation in Ukraine. 

At Investing.com, our reading shows gold could go even higher, to $2,500. 

But at that point, we could also see intraday reversals of between $100 and $150 from the highs to the lows.

Gold: Technical Outlook

Gold’s path of least resistance is seen at $1,916-$1,921, said SK Charting’s Dixit.

“If gold is to rebound, it would need a daily and weekly close above $1,916-$1,921 for a resumption of its bullish momentum and a retest of the $1,975-$2,000 levels.”

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

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