By Barani Krishnan
Investing.com - So, what will be the next shoe to drop on the banks? With no timeline for its finality or what could be expected next, the banking crisis just lumbers on, looking for its next poorly-capitalized victim or one that’s taken too much risk on the balance sheet.
While one might think Wall Street should be most impacted by this, given the interconnectedness of finance and equities, the reality is it’s commodities that’s taking it on the chin - due to the critical liquidity and market-making functions that banks provide the raw materials trade.
If you aren’t up to speed on the nexus between banking and oil then here’s the skinny version: The global oil trade might be worth close to $200 billion at current pricing but not a barrel of crude might move without the funding, or liquidity, provided by banks. Banks are the market makers for all commodities, not just oil, as they bring together buyers and sellers that have different needs, risks, time horizons, and incentives.
The consequences of impairing the role played by banks in commodities could be far-reaching and negative. The development of new wind farms and natural gas power plants may be curtailed because of the inability of developers to hedge their price risks. Independent oil and gas producers and heating oil dealers would have limited ability to hedge the price risks associated with investment and inventory. Airlines, highly vulnerable to jet fuel prices, could be put at risk.
Refineries could be shut down, leading to higher gasoline prices. Overall, competition would be reduced in energy markets, and smaller players would be disadvantaged. Higher volatility would lead to foreshortening of domestic investment, leading to increased foreign energy dependence. And consumers - and the U.S. economy - would be hurt by higher and more uncertain prices.
So there, you have it. Just as some thought the federal takeover in the previous week of Silicon Valley Bank and Signature Bank - along with the timely prop-up of First Republic by JPMorgan Chase and its allies - would have calmed matters, news on Friday that Deutsche Bank’s shares were plummeting due to balance sheet worries sent fresh tremors across global finance.
At this point, the potential for a global contagion from this crisis cannot be understated. As headlines about Deutsche Bank went viral, US Treasury Secretary Janet Yellen, who spent two prior days answering lawmakers in Congress and the Senate on what had gone wrong - and could go wrong - went into a huddle with regulators on the Financial Stability Oversight Council to decide on next steps.
International Monetary Fund chief Kristalina Georgieva said Sunday risks to financial stability have increased and called for continued vigilance although actions by advanced economies have calmed market stress. The IMF chief reiterated her view that 2023 would be another challenging year, with global growth slowing to below 3% due to scarring from the pandemic, the war in Ukraine and monetary tightening. Even with a better outlook for 2024, global growth will remain well below its historic average of 3.8% and the overall outlook remains weak, Geogieva added.
Oil markets appeared to be on the cusp of a more material rebound in the just-ended week, before the banking crisis reared its head again. At the close, crude prices regained less than half of the $10 per barrel they lost the prior week. With oil producers and exporters in OPEC+ due to meet April 3 with ostensibly some tricks up their sleeves to push the market up, crude remains on course for its steepest first-quarter drop since 2020, when the pandemic wiped out demand.
A potential U.S. recession, robust Russian oil flows in the face of Ukraine-related sanctions by the West and strikes at refineries in France have all come to roil the oil markets as we know it.
Oil: Market Settlements
New York-traded West Texas Intermediate, or WTI, crude performed a final trade of $69.20 on Friday. WTI settled the session officially at $69.28 per barrel, down 70 cents, or 1%, after hitting a session low of$66.85 earlier in the session. It was the second day in a row that WTI fell about a percent or more at the close.
Notwithstanding the slide in the past two sessions, the U.S. crude benchmark finished the week up 3.8%, after factoring in gains from the first three days of the week. In the prior week, WTI lost almost 13% on the back of the banking crisis.
London-traded Brent crude did a final trade of $75. It settled down 92 cents, or 1.2%, at $74.99, after a session low at $72.69. For the week, Brent finished up 2.8% after last week’s near 13% tumble.
WTI: Technical Outlook
Despite its botched recovery late in the week, WTI still managed to settle above the 200-week Simple Moving Average of $66.23, giving it hope of a technical-aided recovery, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“This indicates a consolidation and possibility of a technical rebound, which has immediate resistance at the swing high of $71.66, followed by the Daily Middle Bollinger Band $73.50 and 50 Day EMA of $75.10,” Dixit said, referring to Exponential Moving Average. He, however, sounded an important caveat for oil: If March closing comes below the 200-Month Simple Moving Average of $72.62, WTI runs the risk of a correction digging deeper into the 100-Month SMA of $58.90 over an extended period of time.
Gold: Market Settlements and Activity
Gold futures notched a fourth straight weekly gain, settling within striking range of the key $2,000 target, as fresh ructions in the U.S.-to-Europe banking crisis limited fallout from the dollar’s rebound that weighed on the yellow metal.
Gold returned to $2,000 an ounce during Friday’s session but closed off those highs as the Dollar Index, which pits the U.S. currency against six majors rose for the first time in a week.
Notwithstanding the dollar’s rally, the investor flight to safe-havens, particularly gold was still evident. Heightened inflation worries were also keeping gold on investors’ minds despite a senior Federal Reserve official saying on Friday that there might be just one more U.S, rate increase in the current hiking cycle.
James Bullard, St. Louis Fed president and well known hawk, said a rate increase at the May 3 or June 14 meeting of the Fed might be the last for now. The central bank has added 475 basis points to rates since March 2022 in its bid to fight the worst U.S. inflation in 40 years.
"Gold prices will remain supported amidst heightened U.S. economic policy uncertainty and the risk of elevated headline inflation,” analysts at Montreal-based BCA Research said in a note.
Gold for April delivery did a final trade of $1,981 per ounce on New York’s Comex on Friday. It earlier settled the session at $1,983.80, down $12.10, or 0.6%, on the day. The benchmark gold futures contract hit a session high of $2,006. For the week, it showed a gain of 0.5%, rising for a fourth straight week that has delivered a net gain of more than 9% to longs in the game.
The spot price of gold, more closely followed than futures by some traders, settled at $1,978.61, down $15.35, or 0.8%. Spot gold hit a session high of $2,002.97.
Spot Gold: Technical Outlook
The Dollar Index needs to retest and drop below 101.50, while 10-year Bond Yields have to go under 3.28 and 3.15 to clear spot gold's path for $2k and above, said SKCharting’s Dixit,
“Spot gold's upward rebound towards $2,070 seems to be undergoing a bumpy ride with several obstacles en route,” he said.
Dixit said spot gold’s weekly chart shows Relative Strength Index divergence, which seems out of sync with higher highs, and this calls for caution.
“At this point, $2010 is the immediate challenge, below which bears are trying to make another attempt to push prices down,” he said. “Sustainability of the uptrend hinges on bulls' ability to defend the support zone dynamically positioned at $1,972-$1,962. If this fails, it can take gold down towards the next swing low of $1,935-$1,931.”
However, if the support zone of $1,.972-$1,962 remains strongly anchored, gold could witness the continuation of a bullish momentum leading to a revisit of $,2010 and heading for the next resistance cum targets of $2,020-$2,040, followed by major resistance at $2,056,
Natural Gas: Market Settlements and Activity
U.S. natural gas futures posted a third straight weekly loss, returning to the low $2 levels, as the close of an unusually-warm winter and the ushering in of balmier spring weather suggested neither heating or cooling demand that would make a material difference to investors in the fuel.
Gas for April delivery on the New York Mercantile Exchange’s Henry Hub performed a final trade of $2.181 on Friday. It earlier settled the session at $$2.216 per mmBtu, down 2.9% on the day. For the week, the front-month gas futures contract lost about 5%.
A mostly warm 2022/23 winter has led to considerably less heating demand in the U.S. versus the norm, leaving more gas in storage than initially thought. Responding to the warmth and lackluster storage draws, gas prices plunged from a 14-year high of $10 per mmBtu in August, reaching $7 in December before trading mostly at mid-$2 levels over the past month.
Gas in storage stood at a total 1.9 tcf, or trillion cubic feet, as of March 17 - up 36.1% from the year-ago level of 1.396 tcf and 22.7% higher than the five-year average of 1.549 tcf, the EIA, or Energy Information Administration, reported.
Natural Gas: Technical Outlook
As April gas’ 5-Day EMA keeps moving away downwards, with a gap between the Daily Middle Bollinger Band above it increasing gradually, the swing low of $1.967 remains untouched while the Daily Stochastic at 15/8 make a positive overlap,
“We are likely to witness a Technical rebound IF $1.967 is not breached on the downside,” Dixit said. In such a case, the Daily middle Bollinger Band of $2.52 would be immediate resistance, above which the 50-Day EMA of $2.89 would come. On the flip side, a retest of and sustained break below the swing low of $1.967 will extend the decline towards $1.75. before matching $1.43.
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.