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Sunday, December 1, 2019

Energy & Precious Metals - Weekly Review and Calendar Ahead

© Reuters.  © Reuters.

By Barani Krishnan

Investing.com - What is arguably the most important event of the oil calendar is almost here, but oil bulls may not be feeling too peppy about it. In fact, after Friday’s price crash, those long oil might have an ominous feeling about the Dec 5-6 OPEC meeting.

For weeks, the Organization of the Petroleum Exporting Countries has been telegraphing to the market that it hopes to keep the production cut pact it made with Russia and other allies a year ago in place until June, and prices will remain supported at current levels or even higher.

Now, that looks easier said than done.

That’s because on Friday the market heard from Russian Energy Minister Alexander Novak that he would prefer if the OPEC+ partnership took a decision closer to April on extending the production cut deal, set to expire in March. For a market that initially thought OPEC+ might not completely rule out deeper production cuts at its December meeting, Novak’s remarks couldn’t have sent a worse message.

The Russian stance, and President Donald Trump’s signing of two bills aimed at supporting protests by Hong Kong rioters against Beijing - a move further threatening the U.S.-China trade deal - sealed oil’s fate last week, leading to a 5% crash in crude prices.

Oil is still up strongly on the year, with U.S. West Texas Intermediate crude showing a 22% gain on the year and global benchmark U.K. Brent 12%. Yet, if OPEC doesn’t continue cutting production, it’s hard to imagine those gains holding up. Last week alone, both benchmarks lost more than 4%.

Gold, on the other hand, benefitted from Trump’s latest wavering on China via his Hong Kong actions.

Both gold futures for February delivery on New York’s COMEX and spot gold, which tracks live trades in bullion, settled just in the positive on Friday, erasing losses from earlier in the week.

Energy Review

What will OPEC possibly do in the coming week?

Despite the high drama created by Novak and last week’s resultant price crash, there’s a possibility the cartel will still get a deal before Friday. For all their wavering, the Russians may agree after all to kick OPEC+’s 1.2-million-bpd-cuts can further down the road to June. We’ve seen Moscow at this sort of inflection point before and we’ve seen it ultimately going OPEC’s way. There is a chance it will do so again.

The other question, of course, is whether Saudi Arabia will get the price it wants for crude going forth, particularly with the announcement of the final pre-listing price of its Aramco stock scheduled on the opening day of the OPEC meeting.

A poll by Reuters on Friday showed oil prices will remain subdued in 2020 as growth concerns weigh on demand and fuel a glut of crude.

The survey of 42 economists and analysts forecast Brent to average $62.50 a barrel next year, little changed from last month’s $62.38 outlook, which was the lowest prediction for 2020 in about two years.

Brent has averaged about $64 per barrel so far this year.

“There is simply too much oil in the market,” LBBW analyst Frank Schallenberger said.

OPEC and its allies face stiffening competition in 2020, the International Energy Agency said this month, predicting non-OPEC supply growth to surge next year.

OPEC’s own outlook reflects a surplus of around 70,000 bpd next year. Analysts pegged demand growth at 0.8-1.4 million bpd next year.

“OPEC+ is in an unenviable position, struggling to prop up prices against weak demand growth, fragile market sentiment and strong gains in non-OPEC supply,” Fitch Solutions said in a commentary on Friday.

“It is highly probable that the group will rollover the deal in its current form until at least the end of 2020, but we see limited scope for a new round of cuts, in light of uneven compliance and diminishing returns.”

Adding to the grim outlook for OPEC, data from the Energy Information Administration on Friday showed the United States exported 89,000 bpd more than it imported in September, solidifying its status as a net exporter of crude and petroleum products under government records that began in 1949.

Energy Calendar Ahead

Monday, Dec 2

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Dec 3

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Dec 4

EIA weekly report on oil stockpiles

Thursday, Dec 5

OPEC meeting

EIA weekly natural gas report

Friday, Dec 6

OPEC+ meeting

Baker Hughes weekly rig count.

Precious Metals Review

Both bullion and gold futures edged higher on Friday, reacting belatedly to Trump signing into law on Wednesday the Hong Kong Human Rights and Democracy Act. The bill would allow the U.S. to use trade sanctions against China if it breaches its obligations to respect Hong Kong’s autonomy. Market reaction to Trump’s action was delayed by the U.S. Thanksgiving holiday on Thursday.

China reacted furiously to Trump’s signing of the pro-Hong Kong legislation. Beijing summoned the U.S. ambassador to protest and warn that the move would undermine cooperation with Washington.

Hong Kong, a former British colony that was granted semi-autonomy when China took control in 1997, has been rocked by six months of sometimes violent pro-democracy demonstrations.

Thousands of pro-democracy activists crowded a public square in downtown Hong Kong on Thursday night for a “Thanksgiving Day” rally to thank the United States for passing the laws and vowed to “march on” in their fight.

Trump’s approval of the bills was not unexpected. But it did unnerve markets expecting the president to be more pragmatic amid attempts to bring a bitter 16-month trade war to some kind of initial settlement.

Gold was also aided by a swing lower in chip stocks on Wall Street on Friday after a report that the United States was looking at measures to stop foreign companies from supplying equipment to key Chinese chip customer Huawei.

The Trump administration was considering measures to stop foreign companies from supplying equipment to Huawei - an important customer for several U.S. semiconductor companies - amid concerns the current blacklisting has failed to cut off supplies to the Chinese telecom giant, Reuters reported, citing two sources.

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