By Barani Krishnan
Investing.com - It’s not every day that Donald Trump gets to call out Warren Buffet for being wrong on something, despite the president’s propensity to tweet about anyone and anything.
But the Sage of Omaha’s apparent miss of the surprise rebound in U.S. job numbers for May - which 330 million Americans couldn’t spot either - became a talking point on Friday for Trump, who faulted Buffett for selling off airline stocks “too early” into the Covid-19 shutdowns. The notion that the U.S. economy could be bouncing back quicker-than-thought from the pandemic allowed the president to take a victory lap as risks assets like oil and stocks soared while safe-havens, including gold, plunged.
Besides Trump, Saudi Crown Prince Mohammed bin Salman was also gloating as the week came to an end, possibly imagining himself as the oil market equivalent of Fed Chair Jay Powell.
The Saudi-led Organization of the Petroleum Exporting Countries agreed with Russia and other allies at a Saturday meeting to extend production cuts till July. Beyond the meeting was a more subtle attempt by the cartel’s leadership to try and flip the shape of the oil price curve, so that crude meant for immediate delivery fetches a higher price than that stored in tanks to be sold months down the road.
In aiming for this change, OPEC, which runs on ideas provided by Crown Prince MbS rather than his Energy Minister brother Abdulaziz bin Salman, appeared to be borrowing from the playbook of central banks like the Federal Reserve that often focus on the interplay between long- and short-term interest rates, Bloomberg noted.
For investors in oil and gold, it’s important to understand the jubilance in both the White House and House of Saud this week because how U.S. jobs numbers perform from here and how the trade responds to price manipulation maneuvers by OPEC and its allies will likely decide the direction for both crude and bullion.
“The oil price rally went into overdrive after a surprisingly robust U.S. labor market report,” Ed Moya New York’s OANDA said, referring to the May addition of 2.5 million jobs that countered analysts’ expectations for a loss of 8 million. “The economic recovery is already happening and that could do wonders for crude consumption.”
As for gold, shorts rushed for the exits after being stunned by the robust nonfarm payroll report, Moya observed. “It will be hard for the Fed to remain extremely accommodative if the world’s largest economy is already in recovery mode,” he said.
Even so, not all may be well with oil in the coming weeks.
Six weeks of non-stop price increases in crude could also lead to unexpected gains in supply from both within and outside OPEC+, diluting the alliance’s commitment to rebalance the market over the longer-term.
OPEC+, which includes Saudi Arabia’s key ally Russia, approved on Saturday a one-month rollover of their 9.6 million-barrels-per-day production accord, brushing aside Mexico's defection from the pact while receiving pledges of improved compliance from Iraq, Nigeria, Angola and Kazakhstan. The cuts — originally at 9.7 million bpd with Mexico’s commitment -- had been scheduled to taper to 7.7 million b/d in July through the rest of the year.
Saudi Arabia, the UAE and Kuwait had previously agreed to institute an additional 1.2 million bpd in cuts for June but have indicated they would not be willing to continue those curbs in July.
That’s not all. From Texas to Rumaila in southern Iraq, the resurgent price of crude is tempting drillers to turn out more barrels than less. And that could result in an even greater shortfall in OPEC+ cuts than the loss of Mexico’s 100,000 bpd commitment.
Since bottoming at $10.07 on April 28, U.S. crude’s West Texas Intermediate benchmark has made an astronomical gain of nearly 300%. WTI for delivery in another two years, which U.S. drillers particularly sell forward.
In the case of global crude benchmark Brent, spot oil is up 165% from an 11-year low of $15.98 on April 22. Dated Brent contracts have, meanwhile, zoomed up more than 210%.
"We question the stability of the bargain in a rising price environment," analysts with ClearView Energy Partners said in a note.
As early as a month back, shut-in oil wells In the Permian Basin’s Midland region have started reopening, even as U.S. crude production as a whole has continued to fall, dropping nearly 2 million barrels from record highs of 13.1 million bpd in mid-March.
The global picture for production further weakens the fundamentals for oil at beyond $40 per barrel.
Not only is Mexico free to boost output, Iraq's ability or willingness to rein in any more production is in doubt while Libya could see a 400,000-bpd revival as tribal groups controlling key oil fields enter peace talks, S&P Global’s Platts noted in an analysis.
In gold’s case, despite the risk rally in stocks, some remained optimistic that the yellow metal would regain a little of its upward momentum from the continued flow of stimulus money to markets and geopolitical events.
The Fed, or Federal Reserve, along with the U.S. Treasury and Congress have jointly approved and disbursed trillions of dollars in loans, grants and outright aid to businesses and individuals in recent months to shield them from the Covid-19-triggered economic downturn.
“I expect a return by next week to the basics of global economic recovery, before more headlines on Middle East worries, China-U.S. tariffs, debt and creeping — not negative interest rates — give gold a leg up,” said George Gero, managing director in charge of the precious metals portfolio at RBC Wealth Management in New York.
OANDA’s Moya agreed partly with that view.
“Gold might not get much more support from the Fed, but geopolitical risks, second wave concerns, and an eventually weaker US dollar should keep the longer-term bullish outlook intact,” he said.
Energy Markets Review
Crude Oil WTI Futures settled up $1.54, or 4.1%, at $38.95 per barrel on Friday. It earlier hit a three-month high of $39.68. For the week, the U.S. crude benchmark rose 11.4%, and remains within striking reach of $40 per barrel when trading resumes in the new week.
Brent rose $1.98, or 4.9%, to settle the regular U.S. trading session at $41.97. Earlier, Brent hit a session peak of $42.45, its highest since early March. For the week, Brent rose 19.7%, and could attempt $43 and beyond in the new week its upward momentum holds.
Oil prices jumped on Friday after a surprise rebound in US jobs numbers in May. Speculation that OPEC will extend production cuts at its Saturday video meeting — a wish that came through despite Mexico’s pullout - also supported the market.
Energy Calendar Ahead
Monday, June 8
Private estimates on Cushing oil inventories from Genscape.
Tuesday, June 9
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, June 10
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, June 11
EIA weekly report on natural gas storage
Friday, June 12
Baker Hughes weekly survey on U.S. oil rigs
Precious Metals Markets Review
Gold futures fell nearly 3% Friday, falling off their $1,700 perch, after the Labor Department said in its nonfarm payrolls report that 2.5 million Americans re-entered the workforce in May. Stocks on Wall Street rallied on the news, with the Dow jumping more than 3%. The dollar, a contrarian trade to gold, also rose, though by a more modest 0.3%.
The May payrolls report confounded economists who had predicted a job loss of 8 million in May as the coronavirus kept parts of the U.S. economy closed for a third straight month.
The report also jarred with separate data released a day earlier by the Labor Department, which said it received weekly unemployment claims for the first time from 1.9 million Americans, bringing to nearly 43 million the number receiving jobless insurance since the Covid-19 hit home in March. Gold prices jumped 1% on Thursday, reacting to the jobless claims numbers.
U.S. gold for August delivery settled down $44.40, or 2.6%, at $1,683 per ounce on New York’s Comex. It was the sharpest one day for Comex gold in nine weeks. For the just-ended week itself, August gold lost 2.5%, its most in a week since early March.
Spot gold, which tracks real-time trades in bullion, fell by $28.97, or 1.7%, to $1,685.18. For the week, spot gold lost 2.5%.
* Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.