Commodities Week Ahead: Oil, Gold Edgy, Awaiting Powell Testimony

Nothing’s too good when done once too often, and that includes Chinese rate cuts and European rate hikes. Add to those the possibility of the Fed having another interest rate raise in July after the June pause, and the result is edgy markets from oil to gold and equities.

As early trading for Tuesday got underway earnestly in Asia after Monday’s U.S. Juneteenth holiday, crude and gasoline prices were back in the red along, while bullion was just a touch higher. Futures of Wall Street’s key indices were under pressure as well.

The action came as investors weighed another interest rate cut in China against increasing pessimism over its economic prospects this year.

Concerns are mounting over China’s growth after the latest cut in its benchmark loan prime rate, or LPR, that came after a slew of major investment banks, most recently Goldman Sachs, slashed its outlook for Beijing’s gross domestic product this year.

China’s LPR cut on Tuesday was largely anticipated by markets, given that the country had trimmed short and medium-term lending rates last week following several disappointing economic indicators for April and May.

While the country has been importing and refining oil at a near-record pace, markets fear that steady inventory builds and weak fuel demand, especially as economic growth worsens, could largely stymie China’s appetite for crude imports later this year.

The world’s largest oil importer is struggling to shore up economic growth amid a downturn in its manufacturing and property sectors, which are China’s biggest economic drivers. The two sectors have failed to recover despite the lifting of anti-COVID restrictions earlier this year.

The European Central Bank on Thursday announced a new rate increase of 25 basis points, taking its main rate to 4%.

The bank has raised rates since July 2022 in an attempt to bring down record-high inflation across the region. The latest inflation reading showed prices cooling down at a faster-than-expected pace, with headline inflation coming in at 6.1% in May.

Despite the recent slowing in inflation, the ECB actually raised its headline and core expectations for this and next year. It now expects headline inflation at 5.4% this year, at 3% in 2024, and at 2.2% in 2025.

Anticipation of testimony from Federal Reserve Chair Jerome Powell will keep markets antsy this week, with the U.S. central bank chief likely to offer up more cues on rates and the economy when he addresses Congress on Wednesday.

The prospect of rising U.S. rates has weighed heavily on crude this year, as traders remain concerned that worsening economic conditions amid tight monetary policy could dent oil demand.

U.S. supply is expected to tighten in the near term, especially as fuel demand increases and as U.S. energy firms reduce the number of operational oil rigs for a seventh straight month.

But the prospect of a U.S. recession, buoyed by weak economic indicators from the country, largely offset any optimism over tighter supply.

Global crude supplies remain high despite recent production cuts from Saudi Arabia. Recent reports suggested that Iranian crude exports hit five-month highs in May, while Russian crude shipments to major Asian importers — India and China — remained robust through the month.

By 01:25 ET, U.S. crude’s West Texas Intermediate benchmark was down 48 cents, or 0.7%, at $71.03 per barrel.

Technical charts suggest a drop to below $68 if downside pressure keeps up although a bolt to around $75 was also likely on the upside, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. He adds:

“Amidst positive weekly closing, price action remains capped within the broader range of the 200-week SMA, or Simple Moving Average, of the $67.40 support and horizontal resistance at the weekly Middle Bollinger Band of $74.40.

A break above the mentioned resistance zone will open the door for the next leg higher, targeting the 50-Week EMA, or Exponential Moving Average, of $79.20. But the 5-Week EMA dynamically positioned at $71.50 will see oil retesting the 200-week SMA, or Simple Moving Average, of $67.40.”

In gold, the front-month contract on New York’s Comex was off $1.50, or 0.1%, to $1,960.80 an ounce.

Like oil, uncertainty over rising interest rates, coupled with mixed signals on a potential recession this year, kept gold trading within a tight trading range for the past month.

Prices have moved largely between $1,925 and $2,000 an ounce, with few catalysts allowing for a breakout in either direction.

While the prospect of rising interest rates has kept gains in gold limited, the yellow metal remained supported by some safe-haven demand as investors positioned for a potential recession this year.

Said Dixit of SKCharting:

“Outlook for the week ahead continues to sideways with potential for bearish correction retesting $1,925 and extending to $1,913-$1,900.

On the flip side, sustained consolidation above the 100-Day SMA of $1,942 will help gold resume its advance towards $1,967. Above this, the next resistance zone of $1,975-$1,978 is a challenge for bulls, which needs to be cleared for further advance towards the $1,990-$2,005-$2,015 region.”

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically 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.