Energy & Precious Metals

by Barani Krishnan

Investing.com - OPEC+ has tried to do the smart thing by giving the Emiratis the production hike they sought and the rest of the 22 countries in the alliance minimal output gains, until the greater impact of Covid’s Delta variant plays out over the next few months.

This is relatively “smart,” compared to the oil cartel's actions of the past two weeks.

As my colleague Andy Hecht wrote on Friday, when President Joe Biden came into office, he handed a gift to oil drillers outside the United States by suppressing U.S. production via his green energy policy. Having covered the industry for more than 20 years, I’ll say such boons don’t come easy.

OPEC+ did rejoice over the emasculation of U.S. oil and has leveraged it to the max.

Even so, Saudi Arabia's initial clash with the United Arab Emirates on August production levels gave the impression that the cartel was “doing its best to shoot itself in the foot,” as Hecht contended. Those long on oil will agree: The Saudi-UAE fight has cost OPEC+ more than $5 a barrel over the past ten days, with U.S. crude going from a seven-year high of $76.98 on July 6 to a close of $71.81 by July 16.

However, new reports on Sunday showed a compromise had been struck on the UAE demand by the 23-nation OPEC+ — which groups the 13 member Saudi-led Organization of the Petroleum Exporting Countries with 10 other oil producers led by Russia.

The producer group announced on Sunday that it will increase supply by a further 2 million barrels from August through December, or 400,000 barrels daily each month over the next five months. That's precisely what the alliance had come to the negotiating table with two weeks ago, before the Saudi-UAE disagreement.

The UAE will also get more. It will will see its baseline production, from which cuts are being calculated, increase to 3.5 million bpd from May 2022 from today's 3.168 million.

OPEC+ agreed on new output quotas as well for several members from May 2022, including the UAE, Saudi Arabia, Russia, Kuwait and Iraq.

The Saudis and Russians who lead the cartel will see their baselines rise to 11.5 million bpd each from the current 11 million.

The overall adjustment will add 1.63 million bpd to supply from May next year, according to Reuters calculations.

The net addition of 2 million barrels agreed over the next five months is still short of an estimated 3.5 million barrels of higher demand envisaged for the period. But that demand estimate was also made before the Delta-induced Covid blow-ups we’ve seen in recent weeks.

To be sure, there’s no certainty on what the demand for oil will be over the next five months, though it’s expected to be substantial. Likewise, there’s no knowing what the fall-to-winter wave of the pandemic will be, though it could also be substantial.

In the United States, which has led the world’s vaccination against the virus, Covid cases are on the rise again, exacerbated by the more transmissible Delta variant.

Biden said on Friday his administration was bracing for a “pandemic of the unvaccinated” as latest breakouts appeared to mainly involve those who had resisted vaccination for political and other reasons.

Dr. Francis Collins, director of the U.S. National Institutes of Health, said earlier in the week that the United States was “losing time” in the race to get more than half of the population fully vaccinated before the end of summer. “The Delta variant is spreading, people are dying, we can't actually just wait for things to get more rational,' Collins said.

Vaccines have been available to most Americans for months, but still only 48.2% of the country is fully vaccinated, according to the US Centers for Disease Control and Prevention — and the rate of new vaccinations is on the decline.

Meanwhile, case rates have been going up dramatically. In 47 of the 50 US states, the rate of new cases in the past week are at least 10% higher than the previous week, according to data from Johns Hopkins University. Of those, 35 states have seen increases of over 50%.

OPEC+ has tried to be smart with its production hikes, as only time will tell how demand for oil will be versus the state of the pandemic.

Oil Price Roundup

Oil prices had their worst week in months even after crude prices edged higher Friday.

New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, did a final pre-weekend trade of $71.46 after settling Friday’s session up 16 cents, or 0.2%, at $71.81 per barrel. For the week though, WTI lost $2.75, or 3.7%. That was the largest weekly loss for U.S. crude since the week ended March 14.

London-traded Brent, the global benchmark for oil, did a final pre-weekend trade of $73.14 after rising 12 cents, or 0.2%, to finish Friday at $73.59. For the week, Brent lost $1.96, or 2.6%, for its sharpest weekly decline since the week to May 14.

Energy Markets Calendar Ahead

Monday, July 19

Cushing inventory data from surveyor Genscape

Tuesday, July 20

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, July 21

EIA weekly report on crude stockpiles

EIA weekly report on gasoline stockpiles

EIA weekly report on distillates inventories

Thursday, July 22

EIA weekly report on natural gas storage

Friday, July 23

Baker Hughes weekly survey on U.S. oil rigs

Gold Market and Price Roundup

Gold posted a fourth straight weekly gain despite settling lower on Friday. While the yellow metal returned to the crucial $1,800 support, it certainly seems to be taking its time to progress in that channel.

The benchmark August gold futures contract on New York’s Comex did a final pre-weekend trade of $1,812.60, after settling at $1,815, down $14, or 0.8%. For the week, it rose $4.40, or 0.2%.

August gold has gained just over $45, or 2.6%, since its last negative weekly close five weeks ago, when it also tumbled to a two-month low of $1,761.20.

Yet, there was no certainty about how much impact current inflationary trends in the United States will have on gold, which is generally branded as a hedge against rising pressure prices.

Federal Reserve Chair Jerome Powell’s biannual testimony to Congress this week showed the central bank’s stubbornness in wanting to hold to its $120 billion of monthly bond purchases and super low interest rate of zero to quarter percent for at least another year. To calm his audience of U.S. lawmakers, Powell recited his mantra on U.S. inflation: that it was “transiently higher” for now, but will subside.

While gold rose nearly 1% as Powell made those comments on Wednesday, it could not hold to much of those gains by Friday as the U.S. 10-year Treasury note spiked instead on the back of a robust U.S. retail sales report for June.

“Fed Chair Powell’s testimony to Congress was not enough of a reason for gold to break higher despite his dovish assurances,” Ed Moya, analyst at New York’s OANDA, said.

Gold could have a harder time gaining traction next week, with Fed officials entering their typical blackout period for speeches ahead of the Federal Open Market Committee’s monthly deliberation on monetary policy.

“Gold is likely to remain in choppy trade until we get beyond the July 28th FOMC decision,” Moya said.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.