By Barani Krishnan
Investing.com -- How much time does Joe Biden have before oil gets to $100 a barrel?
Almost every oil trader and his grandmother - which is everyone, really - seems to think that crude is on its way to three-digit pricing; the only question is when it’ll get there.
One reason it hasn’t happened yet is because the president has bought himself some time with tough talk against OPEC and the energy industry in general, which he has accused of price-gouging.
At the same time, most are convinced that Biden doesn’t have too many options to stall one of the greatest bull markets in oil’s history.
With each passing day, with the Inflation Bomb ticking under him, he has to quickly and strategically think of a way to defuse that I-Bomb before it ends up blowing away a good part of his economic agenda and, possibly, his presidency.
The popular opinion on both Main Street and Wall Street is that Biden will order the release of oil from the U.S. Strategic Petroleum Reserve (SPR) to counter the notion that the market is apocalyptically undersupplied. I use “notion” purposefully here.
As much as the three-year lows now in Cushing inventories and the dismal growth in Bakken-Permian output and rig counts - not to mention the jet fuel demand expected from next year’s take-off in international level - the so-called tight-oil idea has been blown out of proportion by the long crowd in crude that has used every little market snippet in its favor to add a dollar or more to prices each time.
The result is the implosion we got earlier this week when the gravity of the long-only BS got too much for a market that had endured it for nine straight weeks. Of course, the rally in crude is nowhere over, as you can read from my market wrap below. But it’s also good to remember there’s only so much fertilizer that even the bulls will be allowed to lay on this market.
Now back to Biden and his potential use of the SPR, which amusingly had seen a range of signals from his own energy czar and administration: Outright endorsement at first from Energy Secretary Jennifer Granholm (in an Oct 6 Financial Times story) before the Energy Information Administration poured cold water on it (no, no ... no SPR release nor ban on U.S. crude exports for now, the EIA said) before Granholm reactivated the plan (sort of) by saying Biden President Joe Biden could take action this week to address soaring gasoline prices.
Well, the week came and went, with no such action from Biden, Granholm or the EIA. What the EIA announced, however, in its monthly Short-Term Energy Outlook on Wednesday, was that global crude benchmark Brent will likely trade at around $82 per barrel for the rest of the year before dipping by $10 next year.
“If the Biden administration was waiting for the EIA to give them a good reason to tap the SPR this week, they did not get one,” said Ed Moya, analyst at online trading platform OANDA.
Thus, the idea of utilizing the SPR isn’t as easy as turning the tap on or off (separately, my Investing.com colleague Geoffrey Smith has written an excellent article on this). There are so many dynamics around the whole thing, the most important being whether America is indeed in a crisis grave enough to risk the nation’s emergency crude supplies.
What if we end up using a substantial part of the reserve and still can’t get the price down meaningfully? Or we do get the market down, only to see it shoot back even higher? The last could very well happen, given potential counter-tightening from a belligerent OPEC unwilling to squander the best chance it has of getting crude back to $100 for the first time in seven years. In order not to be pressured to pump more than it intends, OPEC even downgraded demand for its own crude in the fourth quarter - that’s how sly it can get.
“Whatever SPR release planned by the White House might not be enough to counter further production cuts that OPEC might do in retaliation,” said John Kilduff, founding partner at New York energy hedge fund Again Capital.
And don’t forget that if Biden does get the market down, he still has to rebuild the U.S. reserve. At what price will we do that?
Notwithstanding all this, Kilduff says there still might be a way to make the SPR release effective - by coordinating the decision in Washington with the periodic sales China has been making of its own oil reserves to try and tamp down the market. But there has to be enough political will on Biden’s end first.
“If the U.S. teams up with China to synchronize their SPR releases - and they could, given their improving relations - then it might make a difference,” Kilduff said. “The two biggest oil importers are both suffering now from high crude prices.”
Biden’s more enduring - and effective - option might be to let Iran have that nuclear deal with the six world powers that will take U.S. sanctions off Tehran’s crude and immediately double that miserly 400,000 barrels per day OPEC has been offering the consuming countries.
Iran will ultimately be able to bring 2 million barrels or more to the market if its previous extraction capacity hasn’t been terribly impacted by relative inactivity or damage caused to its economy from the Trump-era sanctions.
There are, however, two major problems in getting an Iranian nuclear deal done. The first is that Tehran has, according to inspectors of the International Atomic Energy Agency, gone so far down the road of uranium enrichment and potential bomb-making that no nation wants to be responsible for rewarding the Mullahs with the financial means as well to accelerate that - and live to regret it later. The other is, of course, loss of “face” for Biden who has demanded that Iran come clean on its nuclear program before any meaningful talks begin - the exact opposite of what the Islamic Republic is suggesting: drop the sanctions and we’ll talk.
Still, the U.S.-Iran standoff - and other options Biden is exploring on controlling inflation - has bought the president some time before the oil rally probably starts resuming again.
“It seems unlikely crude prices can break above recent highs until energy traders see whatever action will come from the Biden administration,” said Moya of OANDA, But he also adds: “The oil market deficit is firmly in place and that should prevent crude from seeing a significant pullback.”
So, as crude bears take some joy at having shaken the tree-tops of the oil rally, each of the circumstances that drove the market lower in the past three weeks had their own issues.
Case in point: Inflation.
The Labor Department reported that the US Consumer Price Index, which represents a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% during the year to October. It was the fastest growth of the so-called CPI since November 1990, an acceleration driven mostly by pump prices of fuel running at seven-year highs.
But the University of Michigan also said in its closely-watched consumer poll released on Friday that most Americans had become accepting of high inflation as a way of life despite consumer sentiment - which accounts for 70% of the economy - falling to a decade low.
Oil Price Technicals
We are adding a technical observation on crude from this week to our review of the oil market, given the significance this has on price swings. It comes from Sunil Kumar Dixit, chief technical strategist at skcharting.com, who regularly contributes technical outlooks to commodity articles run by Investing.com.
Says Dixit of his analysis of U.S. crude’s WTI, or West Texas Intermediate, which settled at $80.79 per barrel on Friday:
The weekly candle stochastic of WTI, following its close on October 17, had reached 97, making it overbought and resulting in negative and bearish overlap.
WTI then formed a bearish price reversal top when it closed the week of October 24 at $82.97, below the previous weekly close of $84.05 on October 17. In the subsequent week to October 31, WTI settled at $81.53.
With the latest weekly close of $80.79 on November 12, the bearish streak extends to a 3rd straight week.
This signals the beginning of 3 Black Crows, a bearish technical formation.
Hereon, the 5-week EMA of $80.87 should be monitored.
A move above $80.87 may help WTI recover to $81.82, which is 50% Fibonacci level retracement of the swing high of $85.40 and swing low $78.24.
A move under $79.77 could see WTI retest the 10-week EMA of $78.71 and previous week's low $78.24, which is major acceleration point for $77 support and the weekly middle Bollinger Band of $74.28.
Oil Price Roundup
Oil’s overextended rally certainly needed a correction and a third weekly loss seems to point toward that.
WTI settled down 80 cents, or almost 1%, at $80.79 per barrel. For the week, WTI was down 0.6%, after back-to-back losses of 2.8% and 0.2% in the previous two weeks. Still, compared to WTI’s seven-year highs above $85 in October, the deficit was just a drop in the barrel, so to speak. The U.S. crude benchmark also remains up 65% for the year.
Brent finished down 70 cents, or 1.2%, to $82.17 on the day. For the week, Brent was down 0.8%, after the back-to-back losses of 1.9% and 1.3% respectively in the previous two weeks. Brent scaled a three-year high above $86 last month and remains up 58% for the year.
Gold Market & Price Roundup
It has exceeded most gold bears’ expectations, but bullion’s true test still lies in its ability to recapture $1,900 pricing and beyond.
U.S. gold futures’ most active contract, December, settled Friday’s trade up $4.60, or 0.3%, at $1,868.50 an ounce. It earlier peaked at $1,871.35 - its highest since June 15.
The yellow metal sparkled for a second week in a row, notching a win of 2.8% this week after last week’s 1.8%. It also rose for a seventh straight day, its longest stretch in the green from the end of June to the first week of July.
“What’s happening to gold is certainly great, but to me, the price still needs to get beyond $1,900 in order to establish its true cred as an inflation hedge,” said Phillip Streible, precious metals strategist at Blue Line Futures in Chicago.
Gold last traded at $1,900 levels in June. Prior to that, during the height of the coronavirus outbreak between March and August 2020, it went from below $1,500 to record highs above $2,100 on fears about the global economy and inflation.
Bullion has always been touted as an inflation hedge. But it wasn’t able to live up to that billing earlier this year as incessant speculation that the Federal Reserve will be forced in a faster-than-expected rate hike had sent Treasury yields and the dollar rallying instead at bullion’s expense.
That trend abated after Fed Chair Jay Powell assured earlier this month that the central bank will be patient with any rate hike that will only come after the middle of 2022 and most likely toward the end of the year.
This week’s rally in gold came as the Labor Department reported that inflation in U.S. consumer prices was running at their highest since November 1990.
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.