#Commodities Year Ahead 2024: #Fed Policy to Drive #Gold,#Oil to Dance to Rhythm of #OPEC+ (16 Dec 2023)

• Gold enters uncharted territory twice in 2023
• Fed policy to remain gold’s main driver in 2024
• Industrial metals to stay locked on China
• Easing demand, OPEC+ supply, and geopolitics will shape crude oil

Fed rate cut expectations fuel gold

After a dull 2022, gold staged a decent comeback in 2023, entering uncharted territories twice and appearing to be headed for a more than

10% yearly gain. The only period where the precious metal trended lower was between May and early October, but after hitting a six-month low of $1,810 on October 6, the bulls took charge and drove the metal to a new record of around $2,145 in early December, although it corrected lower thereafter.

The May-October slide was the result of stronger-than-expected US data triggering a rally in both Treasury yields and the US dollar. That said, the conflict between Israel and Hamas put a floor to the slide, with the rebound evolving into a strong short-term uptrend as US data began to soften, suggesting an economic slowdown ahead. Combined with inflation cooling faster than expected and the Fed revising its dot plot lower in December, this allowed investors to pencil in sharp rate cuts, which reduced the opportunity cost for holding the precious metal.

Record buying by central banks also helps

Another supportive factor for the yellow metal was that central banks have expanded their bullion reserves by 337 tons in Q3, resulting in a net 800 tons of gold during the first three quarters of 2023, which constitutes a record for a Q1-Q3 period. Surging consumer prices may have triggered a rush to gold by central banks as a store of value. However, even with inflation cooling down, the trend may continue due to concerns about a global economic slowdown that may require monetary easing, which could result in currency devaluation. Thereby, gold can be used as a hedge against depreciating currencies.

Rally could continue in 2024, but downside risks may intensify in H2

With that in mind, expectations of massive rate cuts by the Fed next year and solid central bank purchases are likely to allow gold to continue shining in 2024 as Treasury yields and the dollar stay pressured, with geopolitical uncertainty perhaps still permitting some safe haven flows periodically.

Nonetheless, there are downside risks to that outlook and the most recognizable may be the market getting proved wrong about penciling in so many rate reductions. Even if the Fed starts cutting during the first half of the year, data may begin to suggest that the economy is not doing as bad as initially feared, and thus policymakers may not proceed with as steep a rate-cut path as the market currently implies for the rest of the year. Thus, as they face reality, investors may begin to lift their implied path, which could prove positive for the US dollar and Treasury yields, and thereby result in a correction in gold.

Another risk towards the end of 2024 may be the US presidential election in November. Eleven months is too distant a horizon for the markets to start focusing on this event, but as time goes by, it may be difficult to ignore the risk of a possible impact the outcome may have. Opinion polls are showing former Republican President Donald Trump neck and neck with incumbent Democrat Joe Biden, with the former favoring spending cuts, but also aggressive tax cuts, which is an inflationary measure. This may increase the risk for the Fed to opt for a higher interest-rate path than the market currently anticipates, thereby exerting more pressure on gold towards the end of the year.

Industrial metals to stay closely linked to China

Iron-ore has been the best-performing industrial metal in 2023, but it was not a smooth sail north throughout the year, with the metal falling sharply during the second quarter on concerns surrounding the Chinese economy, the metal’s largest importer. Nonetheless, Chinese authorities have implemented a series of stimulus measures to heal their wounded economy, with the positive effect being reflected in some of the recent data sets. This may have been the main driver behind the rally in iron ore prices from August onwards.

Copper did not feel to the same extent the heat of concerns surrounding the performance of the world’s second largest economy, although China imports over 60% of the metal’s global traded volume. That said, this metal did not stage as strong a recovery as iron ore did during the last quarter of 2023, only returning slightly above the levels it began the year.

Looking ahead, if some optimism around China’s recovery is maintained, both metals may continue to benefit, with monetary policy easing around the globe providing a helping hand. The main risks are a continued slowdown in China, perhaps driven by its battered property sector, and central banks not loosening monetary policy as much as currently anticipated by the market.

Oil slides as global demand fizzles

Despite the ups and downs, crude oil prices retained a sideways trajectory, slumping back to their 2023 lows in the final quarter of the year.

Israel’s invasion in Gaza distracted the world’s attention away from the war in Ukraine, evoking memories of the oil crises in the 1970s. But its impact on energy markets has been relatively feeble and temporary as Israel is not an important global oil player and Iran’s direct involvement has not occurred yet despite ongoing tensions in the Middle East.

Instead, declines in crude stocks, OPEC’s production cuts, and hopes for growing oil consumption in China had been a dynamic bullish cocktail throughout the year, lifting WTI crude up to a one-year high of $95 at the end of September.

The oil rally, however, did not last long as recession fears became more pronounced, squeezing prices back to the 2023 floor of $64-$70. Following a year of rate increases and high prices, analysts are still wary of lagged rate hike effects, having revised their demand projections downwards a couple of times recently considering that consumers could adopt more careful spending habits in 2024.

OPEC+ could be the main driver

OPEC, the US Energy Information administration, and the International Energy Agency share the same view of slower demand growth next year, with the former setting its forecast higher at 2.25mln bpd versus the 1.34mln bpd and 1.1mln increase set by the other two respectively. According to forecasts the oil market could shift into a small surplus early next year due to weakening demand, and OPEC+ exporters have already agreed to voluntary output cuts that lifted total curbs up to 2.2 mln bpd for the March quarter.

However, investors are not convinced OPEC and its allies can stay committed to the supply cut plans. The most recent virtual ministerial meeting was initially postponed as some African exporters pushed back against supply reductions following a year of underinvestment. Then, OPEC officials said that output cuts will be announced by individual members rather than the secretariat, making deviations likely, especially as forecasts for higher US supply threaten the oil cartel’s market share.

A price competition through a war of production could be possible between OPEC+ members and the US ahead of the US election. Biden would ideally want to keep fuel prices cheap to balance inflation pressures and fix his damaged political profile. On the other hand, Russia is facing a fiscal breakeven oil price of $114bbl according to the S&P Global commodity insights in the face of its military activities and heightened tariffs. Saudi Arabia’s equivalent is around $85/bbl based on IMF estimates, while any prices below $40/bbl could increase the odds of a debt crisis in regions such as Iran and Angola.

That said, the US might be relatively more vulnerable in such a battle as Biden’s administration sold more than 40% of the nation’s strategic petroleum reserves to keep a lid on fuel prices during the post-pandemic period. Efforts to refill the nation’s reserves could create adverse effects, creating more demand for oil and therefore new tailwinds for crude prices.

Geopolitics to keep investors on toes

Last but not least, geopolitical risks in the Middle East cannot be underestimated. Although investors have downgraded the tensions to a regional issue, there is no breakthrough in the Israel-Hamas war so far, and Iran’s support to militant extremist groups such as Hezbollah and Hamas and its uncertain nuclear program leaves the energy market exposed to a broader conflict that could consequently create new tailwinds.

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Will Deeper #OPEC+ Output Cuts Matter for #Oil Prices? (29 NOV 2023)

• Oil prices slide after OPEC+ alliance delays meeting
• But recent headlines point to consensus
• Oil prices could gain, but any recovery may prove limited
• The meeting was postponed from Sunday to this Thursday

OPEC+ delays decision on lack of consensus

Oil prices tumbled after OPEC and other major oil producing nations, known as the OPEC+ group, decided to delay a meeting scheduled for Sunday, November 26, to Thursday, November 30. Investors may have sold black gold on concerns that the group was unable to reach consensus on further production cuts amid a weakening global growth outlook, as it was anticipated heading into the meeting.

Sources said that this was due to African countries Nigeria and Angola aiming for higher oil output allowance, as they were earlier given lower targets after years of failing to meet the previous ones. Nonetheless, on Friday, news hit the wires that the alliance has moved closer to a compromise, which increases the likelihood of having a consensus on Thursday.

Are deeper cuts on the table?

Before the announcement of the postponement, it was largely anticipated that members are likely to extend or even deepen the existing supply cuts into next year. Saudi Arabia was also expected to stretch its additional voluntary supply cuts to at least the first quarter of 2024, so the big question may be whether there will be consensus of deeper cuts by other nations.

Although Saudi Arabia may be willing to cut more, it will likely want concessions from other nations as well. For example, Iraq is already exceeding its existing production target and could be tempted to take more barrels to the market if an accord to reopen its Kurdish export pipeline is soon reached. Iran’s exports have also been increasing. Iran’s targets have been suspended due to the imposition of US sanctions, but there is clear frustration among Gulf producers regarding soft enforcement by the US. Thus, there may be clear calls for this nation to be also given a target.

Any recovery could be limited and short-lived

As for the market’s reaction, Friday’s news that members have nearly reached common ground did not trigger a rebound in oil prices, which means that investors may be thinking that whatever cuts are decided, the alliance may have been on track to agree more if it weren’t for the disagreements. A relief bounce remains a likelihood in case the group as a whole deepens its production cuts, but the hypothesis that they could have done more could keep the recovery limited and short-lived.

What’s more, US output is also on the rise, hitting new records, which combined with weakening global demand prospects constitutes another reason why any decision-related recovery is likely to be brief. Therefore, oil prices could stay in a downtrend for a while longer, which could result in lower headline inflation around the world and perhaps prompt central banks whose economies are on the verge of recession, like the Eurozone, to cut interest rates earlier than currently anticipated.

WTI’s broader path remains to the downside

From a technical standpoint, WTI’s price structure remains of lower highs and lower lows below the downside resistance line drawn from the high of September 29. What’s more, the 50-day EMA appears ready to fall below the 200-day EMA soon, which could validate the bearish picture. Although the 74.00 barrier provided decent support recently, it could soon be violated by the bears, with the next stop perhaps being the low of November 16 at around 72.15. A break lower would confirm a lower low on the daily chart and could see scope for extensions all the way down to the key area of 67.00.

For the picture to turn brighter, WTI may need to climb all the way above the crossroads of the aforementioned downtrend line and the round number of 80.00.

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#Oil Prices Volatility Amps Up as #OPEC Plans Discussions of Production Quotas (02 JUNE 2022)

 Oil Prices Volatility Amps Up as OPEC Plans Discussions of Production Quotas

The final day of May was one of the most volatile for oil markets this spring. In the aftermath of the EU’s decision to impose an embargo on Russian crude shipped by sea, prices skyrocketed to almost hit $120 per barrel, stopping short just a few cents from the figure. As the U.S. trading session started, profit taking ensued and news about OPEC discussing whether to suspend Russian crude from the oil-production deal weighed on prices.

WTI Oil quickly dropped 5 figures, closing the session around $114.67. With a looming OPEC meeting on Thursday, oil prices could continue to fluctuate wildly as most oil-producing nations lack the capacity to pump out more oil. Will Saudi Arabia and the UAE pick up the slump in Russian production which is expected to drop 8% this year? This could have a dramatic impact on oil markets which have been the top-performing asset over the past several months.

Why it matters?

During the Covid-19 pandemic as demand for oil slumped, a meeting between most major oil-producing nations formed the OPEC+ deal – an agreement that regulated the planned gradual increase in oil production as the post-covid slump in demand subsided. Every month after the OPEC/OPEC+ meeting a planned increase to the production quotas of 400,000 bpd is enacted, and proportionately distributed between oil-producing nations. Since Russia isn’t able to meet its production quota over recent months, the meeting on Thursday could result in this amount being split between other member-states that have spare capacity.

What we’re watching?

The key driving factors coming up are the discussions at the OPEC meeting this Thursday. A WSJ report signaled yesterday that discussions about the exclusion of Russia from planned increases of oil production is underway. If other OPEC members pick up the slack, we could see a temporary relief for oil prices which have been relentlessly rising since the start of the year.

What we’re hearing?

OPEC has reduced its estimate for oil a global oil surplus by 0.5 million barrels per day. With a lower surplus, prices for the commodity have maintained above-trend levels for a protracted period. Meanwhile Russia claims that the European oil sanctions against it could impact the while global energy market.

Take advantage of oil market volatility and take a view on the direction of the oil markets using WTI or BRENT crude oil CFDs. If OPEC producers decide to suspend the quotas for Russian oil, Saudi Arabia and the UAE are the only two countries that have enough spare capacity to pump out more of it. Will this lead to a material and more protracted correction in oil prices or not?

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Week Ahead: ,#OPEC+,Eurozone #CPI, & US #NFP (30 MAY- 3 JUNE 2022)

With the shortened week in some areas and a plethora of economic data, there is potential for another volatile week ahead.

Last week, the RBNZ took its turn at hiking interest rates by 50bps. This week the Bank of Canada will get its chance to discuss interest rate policy when it meets on Wednesday. Will the BOC hike by 50bps? OPEC+ will meet this week as well and decide whether to raise output more than the expected 432,000 bpd. In addition, there were many comments last week regarding when, and by how much, the ECB will raise interest rates at its July meeting. Markets may get a clearer picture when the Eurozone CPI Flash is released on Wednesday. Also, the US will release Non-Farm Payrolls this week. With Powell mentioning that getting inflation down may come at the expense of a 3.6% Unemployment Rate, this will be an important NFP to watch!

RBNZ

The RBNZ hiked rates last week by 50bps, raising the key OCR rate to 2%, as expected. This was the 5th consecutive meeting the RBNZ has hiked rates. However, the surprise came in the guidance that followed. The central bank members noted that the neutral rate was between 2% and 3%, though they expect rates to rise above the neutral level. They also increased their OCR forecasts to 2.68% in September vs 1.89% previously, 3.88% in June 2023 vs 2.84% previously, and 3.95% in September 2023 vs 3.1% previously. The central bank also noted that it favored larger increases earlier in the tightening cycle to keep inflation from becoming persistent. The hawkish outlook helped the Kiwi rally, with NZD/USD up nearly 2% on the week.

Bank of Canada

The Bank of Canada meets on Wednesday this week to discuss monetary policy. At the previous meeting, the central bank said that interest rates would need to continue to increase as inflation persists above target. The BOC raised its outlook on inflation for the first half of 2022 to 6%, up from 5% previously, and said that it sees inflation remaining well above the 2% inflation target for the year. The April CPI print was 6.8% YoY, the highest since January 1991, while the core inflation rate was 5.7% YoY, the largest on record! Expectations are for the BOC to raise rates by 50bps from 1% to 1.5%. However, given the hawkish inflation outlook from the last meeting, as well as the recent high inflation readings, is it possible that the Bank of Canada may surprise the markets and raise rates by 75bps?

OPEC+

OPEC+ meets this week to discuss whether to raise output by more than the expected 432,000 bpd in July. The price of crude oil was on the rise last week, with WTI trading to a high of 115.17, near 2-month highs. With the reopening of Shanghai after a 2-month lockdown, many are expecting increasing demand. In addition, the EU is trying to finalize its embargo of Russian oil, which is said to hopefully be completed by May 31st. This will increase demand from other areas of the world. However, despite the demand side issues, OPEC+ sources have already said that it will stick to the existing expectations of 432,000 bpd at this week’s meeting.

Earnings

With an unsettling earnings season winding down, there are still a few names to watch for this week. A few names to be on the look out for are as follows:

WB, HPQ, CRM, GME, AVGO

Economic Data

Lots of ECB members on the wires the last few weeks discussing interest rate increases at the July meeting, including ECB President Christine Lagarde. Last week, some members were even discussing the possibility of a 50bps hike at the July meeting! This has helped send EUR/USD bid. This week, the EU will release its CPI Flash estimate for May. Expectations are for the headline CPI to rise to 7.7% YoY vs 7.4% YoY in April. This reading may help to paint a clearer picture of what the ECB may do next. In addition, The US will release Non-farm Payroll data this week. Expectations are for 310,000 new jobs to have been created in May. The Unemployment Rate is expected to remain unchanged at 3.6%. Keep in mind that the Fed Chairman Powell said recently that getting inflation down may come at the expense of a 3.6% Unemployment Rate. Therefore, expect that the Fed will be paying close attention this data! Other important economic data due out this week is as follows:

Monday

• EU: Economic Sentiment (MAY)
• EU: Consumer Inflation Expectations (MAY)
• Germany: CPI Prel (MAY)

Tuesday

• Japan: Retail Sales (APR)
• Japan: Unemployment Rate (APR)
• Japan: Industrial Production Prel (APR)
• New Zealand: ANZ Business Climate (MAY)
• Australia: Building Permits Prel (APR)
• Australia: Company Gross Profits (Q1)
• China: NBS Manufacturing PMI (MAY)
• China: NBS Non-Manufacturing PMI (MAY)
• Japan: Consumer Confidence (MAY)
• Japan: Housing Starts (APR)
• Germany: Unemployment Rate Harmonized (APR)
• Germany: Unemployment Change (MAY)
• UK: Mortgage Lending (APR)
• EU: CPI Flash (MAY)
• Canada: GDP Growth Rate (Q1)
• US: S&P Case-Schiller Home Price (MAR)
• US: Chicago PMI (MAY)
• US: CB Consumer Confidence (MAY)

Wednesday

• Global: Manufacturing PMI (MAY)
• Australia: GDP Growth Rate (Q1)
• China: Caixin Manufacturing PMI (MAY)
• Germany: Retail Sales (APR)
• UK: Nationwide Housing Prices (MAY)
• EU: Unemployment Rate (MAY)
• Canada: BOC Interest Rate Decision
• US: ISM Manufacturing PMI (MAY)
• US: Beige Book

Thursday

• OPEC+ meeting
• Australia: Trade Balance (APR)
• EU: PPI (APR)
• US: ADP Employment Change (MAY)
• Canada: Building Permits (APR)
• US: Unit Labor Costs Final (Q1)
• US: Nonfarm Productivity Final (Q1)
• US: Factory Orders (APR)
• Crude Inventories

Friday

• Global: Services PMI Final (MAY)
• Australia: Home Loans (APR)
• Germany: Trade Balance (APR)
• EU: Retail Sales (APR)
• US: Non-Farm Payrolls (MAY)
• Canada: Ivey PMI s.a. (MAY)
• US: ISM Non-Manufacturing PMI (MAY)

Chart of the Week: Weekly NASDAQ 100 (NDX)

The NASDAQ 100 made a pandemic low of 6671.91 during the week of March 23rd, 2020. NDX then proceeded to rally to an all-time high of 16764.86 during the week of November 22, 2021, a gain of over 147%. However, as it became more and more apparent that inflation wasn’t as transitory as the Fed thought, NDX began to pull back, including losses the last 7 weeks in a row. Rising interest rates are not good for stocks! Last week, the NASDAQ 100 retraced 50% of the March 2020 low to the November 2021 high, at one point trading below 11768.38. However, the index rallied held the support level and closed the week up over 6.5%. Price also formed a bullish engulfing pattern on the weekly timeframe, indicating that NDX may have further to run. First resistance on the weekly timeframe is at 13020.4. Above there, price can run to the weekly highs from March 28th at 15265.42 and then to the all-time highs at 16764.86. First support is at the recent lows of 11492.29, then the 61.8% Fibonacci retracement level from the March 2020 low to the November 2021 high, at 10589.22. Below there, the NASDAQ 100 can fall to horizontal support dating to February 2020 at 9736.57.

Monday is a US bank holiday and Thursday and Friday are bank holidays in the UK. Be careful of illiquid markets during those time zones on those days. In addition, this week will bring the BOC, OPEC+, and a plethora of economic data. With the shortened week in some areas and a plethora of economic data, there is potential for another volatile week ahead.

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