Wednesday, October 27, 2021

Energy & Precious Metals – Weekly Review and Calendar Ahead

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(C) Reuters

By Barani Krishnan

Investing.com — While the world’s attention was riveted to the epic swing in oil prices this week, where U.S. crude plunged 7.5% Monday and recovered all that by Friday, another energy market gained 11% on the week, barely making a ripple.

Natural gas closed the week at above $4 per mmBtu, or million metric British thermal units, the first time it has done so since December 2018. That’s a big deal in the world of heating/cooling and power generation, which is what natural gas is primarily for in the United States.

But natty, the trade’s moniker for natural gas, is also the diminutive cousin of WTI, or West Texas Intermediate, the benchmark for U.S. crude.

At Friday’s settlement, open interest in natty’s most-active September contract was around 338,000 lots. Multiply that with 1,000 units per lot, at the current average value of $4 per unit, and you get $1.4 billion. That’s the size of the front-month position in U.S. natural gas.

WTI, on the other hand, had 476,000 lots of open interest in its most-active September contract as the week closed. Multiply that with 1,000 barrels per lot, at around the current average price of $70 each, and you get $33 billion.

You get the idea why one energy market makes so few headlines while the other practically dominates the commodity trading world.

There’s another reason too: price.

Crude prices, including that of the London-based global oil benchmark Brent, respond quickly and often dramatically to world events. Natural gas prices, in contrast, are driven by regional factors and are hardly connected to the international market, despite LNG, or liquefied natural gas, being exported across the world.

Notwithstanding its dwarfed value and importance to crude, natty is still having a phenomenal year. Year-to-date, it is up 60%, just slightly behind gasoline, the top U.S. fuel, which at the week’s close, was up 63% on the year. Crude markets are, meanwhile, underperforming natty, with WTI’s gain at 49% on the year after this month’s volatility and Brent at 43%.

Natural gas’ upward trajectory, meanwhile, may be far from over due to a combination of persistent production struggles and bullish weather forecasts as record heat across the United States this summer results in blowout cooling demand. As a direct consequence of gas prices, electricity rates are spiking as well.

Demand for gas-fired power is set to climb in the coming days, with the U.S. heatwave set to peak on Wednesday, said Dan Myers, analyst at Houston-based gas market consultancy Gelber & Associates.

“Based on current temperature forecasts, which have held relatively steady today, gas-fired power demand is expected to reach one day levels above 45 Bcf/d and surpass late June’s heights,” Myers said.

“Gas demand from the power sector has largely outperformed this summer and continues to hold a larger than expected share of the generation mix.”

Gas is dominating the fuel mix of regional utilities comprising MISO (Midcontinent Independent System Operator), SPP (Southwest Power Pool), PJM (Pennsylvania-New Jersey-Maryland) and ERCOT (Electric Reliability Council of Texas).

Since recovering from a processing outage earlier this month in the Northwest, gas production has failed to show any meaningful increase and remains trapped in the 90-91 bcf, or billion cubic foot, per day range.

Dry gas’ weekly average supply remains relatively flat at near 90.7 bcf per day, with little change projected in weekly storage reports issued each Thursday by the EIA, or Energy Information Administration.

Cheaper coal is the fuel utilities typically turn to when squeezed by natty’s cost. But coal mine retirements and a lack of renewables such as wind have reduced utilities’ ability to switch out of gas.

But natty’s share of the power mix is still notably lower than this time last year, while that of coal has already surpassed last summer’s peak.

Wind generation remains suppressed and continues to put pressure on thermal generation (coal and gas) to fill the gap.

Although both coal and gas generation will increase with next week’s rising temperatures, gas is again likely to put in the most work covering next week’s peak power load in spite of higher prices.

Oil Market & Price Roundup

WTI did a final pre-weekend trade of $72.17 after settling Friday’s session up 16 cents, or 0.2%, at $72.07 per barrel. For the week, WTI rose 0.4%.

Brent did a final pre-weekend trade of $74.20 after rising 31 cents, or 0.4%, to finish Friday at $73.59. For the week, Brent gained 0.7%.

Oil managed to eke out a gain after starting the week with the worst tumble in 16 months that left longs in the market shaken but unscathed.

What oil bulls need to hope for in coming weeks is that the consumption of U.S. gasoline does not let up in a significant way that will allow reports of Covid cases emerging from the Delta variant to usurp the demand narrative.

WTI’s 7% plunge on Monday was the first rude awakening in two months for longs in the market. In that period, they had managed to push prices up by 25% on the back of OPEC+’s success in clearing the crude glut from the pandemic to create the so-called tight oil – or supplies implied at below five-year seasonal levels.

The 23-nation OPEC+ – which groups the 13 member Saudi-led Organization of the Petroleum Exporting Countries with 10 other oil producers led by Russia – said last week it will raise supply by 2 million barrels from August through December.

While it was the first major production increase by a group that had previously cut 10 million barrels a day at the height of the pandemic, the OPEC+ maneuver still rattled investors amid a risk aversion on Monday that hit stock markets and almost every other risk asset.

“We need to realize that much of the oil demand that’s being touted is now held up by one thing: U.S. gasoline,” said John Kilduff. “Unless jet fuel takes off in a big way again from the restart of global travel, the demand picture could be more implied than real. If gasoline, for any reason, doesn’t perform as expected, oil could have a real problem then.”

Energy Markets Calendar Ahead

Monday, July 26

Cushing inventory data from surveyor Genscape

Tuesday, July 27

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, July 28

EIA weekly report on crude stockpiles

EIA weekly report on gasoline stockpiles

EIA weekly report on distillates inventories

Thursday, July 29

EIA weekly report on natural gas storage

Friday, July 30

Baker Hughes weekly survey on U.S. oil rigs

Gold Market and Price Roundup

Gold longs, clinging by their nails to $1,800 territory, saw the yellow metal’s first weekly loss in five as it remained disconnected from expectations of steady inflation in the United States.

A volatile week in risk markets which culminated in outsized gains for stocks also left safe havens such as gold sidelined.

“Gold is softer as risk appetite runs wild, with the S&P 500 index making a fresh intraday record high following robust earnings and as Treasury yields appear poised to close near this week’s high,” noted Ed Moya, head of research for the Americas at broker OANDA.

Front-month gold futures on New York’s Comex did a pre-weekend trade of 1,801.90 an ounce, after settling down $3.60, or 0.2%, at $1,801.80.

For the week, gold futures slid 0.8%, after gaining 2.6% over four previous weeks.

Gold is also having an uncertain week due to the blackout period for speeches by Federal Reserve officials ahead the central bank’s policy meeting on July 27-28.

Conviction has become a rare commodity in gold as the average long investor tried to stay true to the yellow metal through its travails of the past six months.

Since January, gold has been on a tough ride that actually began in August last year – when it came off record highs above $2,000 and meandered for a few months before stumbling into a systemic decay from November, when the first breakthroughs in COVID-19 vaccine efficiencies were announced. At one point, gold raked a near 11-month bottom at under $1,674.

After appearing to break that dark spell with a bounce back to $1,905 in May, gold saw a new round of short-selling that took it back to $1,800 levels before talk of monetary tightening by the Federal Reserve knocked it even lower to mid-$1,700 levels.

For the record, the Fed has indicated that it expects two hikes before 2023 that will bring interest rates within a range of 0.5% to 0.75% from a current pandemic-era super-low of zero to 0.25%. It has not set a timetable for the tapering or complete freeze of the $120 billion in bonds and other assets it has been buying since March 2020 to support the economy through the Covid crisis.

Also, somewhat lost in the whole transition is gold’s position as a hedge against inflation despite trillions of dollars of government spending since the outbreak of the pandemic.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditure Index, meanwhile, grew by a multi-year high of 3.4 percent in the 12 months to May.

Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.

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