Commodities News

Energy & Precious Metals – Weekly Review and Outlook

By Barani Krishnan — Will they or won’t they? Europe’s forthcoming action against Russian oil and gas – a potential ban – is like a Sword of Damocles hanging over the bloc and the energy markets: Damned if you do (economically) and damned if you don’t (politically).

The gravity was reflected in crude’s near 9% rebound in the just-ended week, from a 13% tumble in the previous two, as the trade again tried to price in the injury the European Union would be inflicting on itself from the embargo.

Since the Russian invasion of Ukraine began six weeks ago, crude has experienced its worst price swings in history. The volatility has been largely over one thing – whether the 27 countries in the EU bloc would take the unthinkable step of severing imports from a source responsible for 25% of its oil and 40% of its gas, especially when that decision is so steeped in doing what the West considers as politically and morally correct.

As of Friday, it appeared the dilemma had only worsened.

News reports said EU officials were drafting a phased import ban on Russian oil products, but the measure won’t be floated until after the second round of the French elections at the earliest. 

It was a manifestation of the tight-rope walked by the bloc’s leaders. On one hand, they were eager to fulfill their vow that their imports/money won’t help Russia finance the widely-documented massacre of Ukrainians, such as in Bucha. On the other hand, they were keen to ensure that a key ally like French President Emmanuel Macron does not get punished in polls by his people revolting against high food and fuel prices made costlier every day by the conflict.

“The commission and EU members have smartly shied away from defining red lines that would trigger a sanctions response since Russia attacked Ukraine,” Emre Peker, director at the Eurasia Group consultancy, was quoted saying by The New York Times.

“I expect the EU will shy away from defining triggers,” he added, “as continued escalation by Russia in eastern Ukraine and revelations from Bucha and elsewhere continue to drive momentum behind a hardening European stance. Any other major catastrophes that unfold will just add more impetus to the EU response.”

The EU has taken five rounds of increasingly severe financial sanctions against Russia since Feb. 24. But it has kept sanctions on gas imports off the table, because they remain too critical to Germany, in particular.

Germany also gets 34% percent of its oil from Russia. A key challenge will be not only to find alternative suppliers to make up for that, but also to line up sufficient land transport for oil heading to its two refineries that are fed by pipelines from Russia, in particular a refinery in the eastern city of Schwedt, by the Polish border.

Germany’s ambassador to the United States made clear in a tweet what’s at stake for her country. “Going cold turkey on fossil fuels from Russia would cause a massive, instant disruption,” Emily Haber said. “You cannot turn modern industrial plants on and off like a light switch. The knock-on effects would be felt beyond Germany, the EU’s economic engine and 4th largest economy in the world.”

But it’s not just Europe that’s hurting. Russia is too, admits Putin, even as he talks about diverting Europe-bound cargoes to Africa, East Asia and South America.

“The most urgent problem here is the disruption of export logistics,” the Russian president said, referring to the uprooting of decades of established business practices and relationships.

That comes on top of the pain experienced on Russian energy exports that had been already delivered to Europe but remained unpaid for, Putin said. “Banks from these unfriendly countries are delaying the transfer of funds,” he added.

For now, the drafting of the new European measures is being done by a small number of experts at the European Commission, the bloc’s executive arm, led by President Ursula von der Leyen’s chief of staff, Björn Seibert.

While an EU summit on Ukraine is scheduled for end-May, officials said another Russian offensive in the scale of Bucha could bring forward the meeting to address the oil embargo.

So, what once seemed like an impossible step for Europe looks more likely now – with attendant pain for both sides, of course.

Oil: Weekly Settlements & WTI Technical Outlook

Ahead of the Good Friday holiday, global crude benchmark Brent settled Thursday’s trade down slightly at $111.23 per barrel. For the week, Brent rose 8.7%, after two back-to-back weekly losses that left it down by 13%.

New York-traded U.S. crude benchmark West Texas Intermediate, or WTI, finished Thursday’s trade up $2.26, or 2.1%, at $106.51. For the week, WTI rose 8.8%, after a 13% tumble over two previous weeks.

The U.S. crude benchmark could extend its upside to $119 in the week ahead if its momentum was unbroken, said Sunil Kumar Dixit, chief technical strategist at

“WTI gained a whopping $14 from the previous lows of $92.90,” Dixit noted, adding that its bullish momentum was further established by a RSI, or Relative Strength Indicator, reading of 62 and stochastics at 55/48.

“Going in to the week ahead, prices are likely to stay firm, so long as the 38.2% Fibonacci level of $104.50 remains intact as support, and the rally aims to reach an initial $110-$112, that can be extended to $114-$116 or even $119,” Dixit said.

On the flip side though, a run below $105 could spell trouble for U.S. crude.

“If $104.50 is broken on the way down, a further slide to the 50% Fibonacci level of $96.50 may come rather quickly,” Dixit warned.

Gold: Weekly Market Activity 

Gold inched lower on Thursday but finished with a second consecutive weekly gain as the Ukraine crisis and broadening inflationary pressures lifted the yellow metal’s appeal among safe-haven punters.

In line with gold’s climb, Wall Street also tumbled for a second week in a row on worries that an overly aggressive Federal Reserve might tip the U.S. economy into recession in its bid to fight inflation.

June, the front-month gold futures contract on New York’s Comex, settled Thursday’s trade down $12.20, or 0.6%, at $1,972.50 an ounce. For the week though, it rose 1.7%, adding to the previous week’s 1.2% gain.

“Political risk premium through the Ukraine war escalation is building again, which pushed all prices higher in general commodities and that’s really creating that inflation environment,” Stephen Innes, managing partner at SPI Asset Management, said in comments carried by Reuters.

“On the counter side, the market doesn’t know whether this is just a short-term phenomena, or the markets are sort of paring back a little bit of risk because of what Fed’s Lael Brainard said was less hawkish,” Innes added.

Fed Governor and soon-to-be Vice-Chair Lael Brainard said on Tuesday that the central bank had no hesitation using heavy rate hikes to bring inflation under control.

Adding to the hawkish tone was the FOMC’s meeting minutes from March, released on Wednesday, that said most members of the committee were agreeable to having “one or two” 50 basis point hikes in coming meetings.

Following that, the Fed’s most hawkish policy-maker James Bullard said rates must breach the central bank’s typical target and go as high as 3.5% later this year in order to suppress inflation growing at twice that pace.

“I would like to see the Fed Funds Rate rise to 3.5% in the second half of 2022,” Bullard, who is St. Louis Fed President, said in comments made on Thursday.

After slashing rates to nearly zero at the height of the COVID-19 outbreak, the Fed’s policy-making Federal Open Market Committee, or FOMC, approved the first pandemic-era rate hike on March 16, raising rates by 25 basis points, or a quarter point.

Many FOMC members have concluded since that the hike was too tame to rein in inflation galloping at 40-year highs and that more aggressive increases of 50 basis points may be needed in the future. The central bank is also considering as many as seven rate adjustments in all this year.

Bullard said the Fed was behind in its fight against inflation and needs to raise rates another 3 percentage points before the year’s end. The pace he was suggesting implied that the Fed should embark on 50 basis point, or half-point increases, at each of its six remaining meetings for the year. The Fed’s typical target for inflation is just 2% a year.

After contracting 3.5% in 2020 from disruptions forced by the COVID-19, the U.S. economy expanded by 5.7% in 2021, growing at its fastest pace since 1982.

But inflation grew at an even faster pace. The Personal Consumption Expenditure Index, a U.S. inflation indicator closely followed by the Fed, expanded 5.8% in the year December and 6.4% in the 12 months to February, both also at their fastest in four decades. 

FOMC officials have vowed to bring inflation back to the Fed’s target range of 2% a year anywhere from between the end of 2022 and the end of 2023.

Gold: Technical Outlook

Dixit of, who tracks the spot price of gold, said the week ahead suggests an inflection point for the yellow metal.

“RSI and stochastics are supportive of the ongoing upside momentum, which needs decisive buyers at above $1,980 for the next leg up to $2,001 and $2,015,” he said.

But the weaker close on Thursday itself may cause some sideways action too, he cautioned.

“When the market reopens for Monday’s Asian and European sessions, there could be a downward move to retest $1,959 that can trigger a short-term correction to $1,932,” Dixit said. 

Failure to hold above $1,932 could push gold further down, toward $1,890, especially in an environment of surging U.S. bond yields, he said. 

“Traders need to be watchful about the 10-year and 30-year note yields running to multi-year highs on recession concerns,” Dixit said. “These yields are like double-edged swords that can be both beneficial and destructive to gold, as they spur more inflation-hedging until the dollar starts surging to trigger sell-offs.”

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

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