Commodities & Futures News

Energy & precious metals – weekly review and outlook


By Barani Krishnan — As oil bulls reveled last week in the end to COVID lockdowns in top crude importer China, inconspicuous remarks by Saudi and Moscow diplomats revealed the growing challenge for the OPEC+ heavyweights in finding a workaround to the G7 price cap on Russian oil.

Saudi Arabia was “engaging with Russia over keeping oil prices relatively stable”, Foreign Minister Faisal bin Farhan Al-Saud told a Bloomberg interview in Riyadh on Thursday.

The Saudi diplomat pointed out that it was the kingdom’s stewardship – and Moscow’s help – that enabled the 13-member Organization of the Petroleum Exporting Countries and its 10 allies to boost U.S. crude from minus $40 a barrel at the height of the COVID-19 pandemic breakout in 2020 to just above $130 after the Ukraine invasion in March last year. Global crude benchmark Brent went from under $16 to just below $140 in the same period.

Al-Saud noted oil’s “relative stability” since those highs, comparing them with the “significant price swings” in “other energy sources” – like natural gas, which lost 50% over the past month. But even as he took a victory lap on that, he said there was more to be done: “We have a very important partnership with Russia on OPEC+ … that has delivered stability [to] the oil market … we are gonna engage with Russia on that.”

Ahead of Al-Saud’s comments, that same day, some 1,600 miles away in Ashgabat, the capital of Turkmenistan, Russia’s Deputy Prime Minister Alexander Novak was telling state news agency TASS that Moscow “is not discussing with OPEC+ possibility of its oil production cuts”.

Novak was responding to a question on whether the Kremlin will reduce oil output to demand a higher price for its Urals crude as the G7’s $60-per-barrel cap allows buyers to lowball the Russian product versus rival crude benchmarks such as the U.K. Brent, U.S. West Texas Intermediate, the Arab Light and Dubai Light.

“No, we are not discussing such issues,” Novak said.

At a glance, the Saudi and Russian positions seemed disparate and to be addressing different matters. Al-Saud spoke about engaging Russia to keep oil prices stable while Novak ruled out production cuts by his country. However, anyone who knows the workings of OPEC+ will know how connected the two were; in essence, they were one and the same.

“Uncoded, the Saudi message is that they want to sit with the Russians to tell them to stop selling Urals at prices that are so discounted that they are pulling Brent and Arab light down,” said John Kilduff, founding partner at New York energy hedge fund Again Capital.

“The Russians, in response, are basically saying ‘Don’t ask us to restrict our sales to help you.’ The big energy supply squeeze Russia had counted on this winter to pressure the West into paying more for oil and gas has evaporated with the warm weather we’ve had. The Kremlin probably needs whatever money it can get now for its oil. They’re also saying if they cut production now, they might not be able to get it back on.”

Russia has historically maintained that oil wells drilled in permafrost could not be shut down easily, as they could freeze, requiring them to be drilled all over again when they are reopened. Oil analysts have called the cold weather claim one of the global oil industry’s biggest geopolitical bluffs. While Moscow did cut 20% of its output by teaming up with the Saudis in 2020, it has lately raised concerns again about the health of oil wells shuttered in the winter.

To the Saudis, of course, there is no greater tool to manage supply-demand in oil other than production cuts, although the kingdom’s state oil company Aramco (TADAWUL:2222) routinely tweaks the official selling price of Arab light to obtain desired revenue. With global demand for oil cratering after the global coronavirus outbreak, the Saudis led Russia and the rest of OPEC+ to slash tens of millions of barrels of supply a day. Relatively few hikes have been announced to replace those cuts. The psychological pressure applied by the Saudis on oil consumers has been a major support for crude prices over the past two years.

But the G7 price cap – which came into force on Dec. 5 – has been a game changer.

With Urals’ selling price limited at $60 a barrel versus Brent’s Friday close of $87.63, a discount of at least $25 on paper applies for each barrel of prompt loading for the Russian crude benchmark.

In the actual marketplace, the discounts are bigger, with the chief beneficiaries being India and China – the two biggest buyers of Russian crude.

India bought an average of 1.2 million barrels of Urals a day in December, which was 33 times more than a year earlier and 29% more than in November. Discounts for Urals at Russia’s western ports for sale to India under some deals widened to $32-$35 per barrel when freight wasn’t included, according to a Reuters report from Dec. 14.

The Indians even exported fuel produced from Russian crude to New York via a high-seas transfer at one point, despite U.S. sanctions prohibiting the import of Russian-origin energy products, including refined fuels, distillates, crude oil, coal, and gas.

Another Reuters report from Dec. 8 said China was paying the deepest discounts in months for Russian ESPO crude oil amid weak demand and poor refining margins. ESPO is a grade exported from the Russian Far East port of Kozmino and Chinese refiners are dominant clients for this.

At least one ESPO cargo for early December arrival was sold to an independent Chinese refiner at a discount of $6 per barrel against the February Brent price on delivery-ex-ship (DES) basis, Reuters said, citing four traders with knowledge of the matter. That discount compared with a premium of about $1.80 fetched by an ESPO barrel in China three weeks prior to the deal. Brent’s plunge to a one-year low of just above $75 by Dec. 9 exacerbated the discount for Russian crude, though the U.K. crude’s rebound to near $88 this week would have narrowed the difference.

The United States and its European allies – the chief proponents of the G7 price cap – are, meanwhile, delighted that Russian oil is going so cheaply and abundantly to the market.

The West’s original idea was to limit the Kremlin’s earnings from oil to slow the Russian military’s advance in Ukraine. That has begun working with the price cap.

And while Western countries have banned Russian crude imports, they want to ensure they have enough refined products for their consumers and industries. India and China have stepped up petrol and diesel production with their bumper Urals purchases and some of those are finding their way to Western destinations outside of the U.S. The United States itself appears sufficiently stocked with enough refined products for the winter.

Thus, when U.S. Treasury Secretary Janet Yellen toured Africa this past week, she took a victory lap on how well the G7 price cap was working. Aside from the West, some 17 of Africa’s net-oil importing countries could save a combined $6 billion annually from the price cap, which allowed them to use the discounted Russian oil as a basis for negotiating the purchase of any crude.

So, what can those opposed to the price cap do?

The Russians could demand a higher price for the oil they are selling to India and China. The question is how much more. If Brent continues to rally, an upward adjustment for Russian oil prices becomes natural. In the absence of that, Moscow might have to think about playing hardball with the only two countries it can conveniently sell its oil to amid the U.S. sanctions.

The Saudis could announce a significant production cut by OPEC+ which the kingdom itself would largely carry, to avoid protests from others in the cartel already upset over the loss of market share. The Saudis announced in November a 2 million barrel per day cut that would take effect in December. Brent hit a three-month high of almost $100 a barrel on that. But Bloomberg later quoted a Saudi official as saying the kingdom shipped 7.21 million barrels a day in December, unchanged from November. “If OPEC+ announces another ‘output cut’, it could be another lie,” said Kilduff of Again Capital. “Most of the alliance members are unable to meet even their production targets. This market trades on headlines and the Saudis know they have enough suckers with the megaphone they wield.”

And while China benefits from low Russian prices, it could save the day for OPEC if demand comes roaring back as projected in the world’s top oil importer. But the China rebound story is also contingent on how successful it is in clamping down on new COVID spikes among its billion-plus people. A U.S. and European recession have been forecast at some point this year as well, to offset the Chinese growth.

It’s going to be an interesting year ahead in oil.

Oil: Market Settlements and Activity

New York-traded West Texas Intermediate, or WTI, crude for March delivery did a final trade of $81.96 on Friday after settling the session up $1.03, or 1.4%, at $81.64. For the week, it rose almost 2%.

London-traded Brent crude for March delivery settled up $1.47, or 1.7%, at $87.66, after a session peak at $87.75. Brent was up 2.8% for the week.

Oil: WTI Price Outlook

With WTI sustaining above the 5-Day Exponential Moving Average of $80.35, signs of further technical advances are emerging for U.S. crude, says Sunil Kumar Dixit, chief technical strategist at

“However, rebound towards the next major resistance of $93.74 requires a strong and sustained break above the 100-Day Simple Moving Average of $82.10 followed by a clearance through $84.70,” said Dixit.

“Meanwhile, a short-term pull back towards the $79 support and a follow-up drop to $75.70 cannot be ruled out,” he added. “This again would very likely attract buyers.”

Natural gas: Market Settlements and Activity

The front-month February gas contract on the New York Mercantile Exchange’s Henry Hub did a final trade of $3.134 per mmBtu, or metric million British thermal units, on Friday. It officially settled the session at $3.174, down 10.1 cents, or 3%.

February gas fell to a 19-month low of $3.11 during the session, sending gas bulls up gasping for air on fears of the market tumbling to $2 levels. Fortunately, for the longs, the moment passed, with the $3 support holding.

Natural gas: Price Outlook

Natural gas could actually go on to break the much-watched $3 support in the coming week, though its drop below that could also be brief, said Dixit.

“The current bearish drop could pause at $2.989 and a short-term rebound towards the resistance zone of $4.75 could start. The rebound will have several twists and turns en route to the $4.75 destination.”

Dixit, however, said the upward projection was based on natural gas staying with its Fibonacci extension. “Natural gas is more of a weather-driven commodity now, where fundamentals rule, rather than technicals.”

Gold: Market Settlements and Activity

Gold for February delivery on New York’s Comex did a final trade of $1,927.70 an ounce on Friday after settling the official session at $1,928.20, up $4.30, or 0.2%. It earlier hit a nine-month high at $1,938.85. data shows that if February gold were to get past $1,950, its next major target would be the April 18 target of $2,003.

Aside from its advance on Friday, the benchmark U.S. gold futures contract rose 0.3% for the week, adding to its 6.7% gain over four prior weeks.

The spot price of gold, more closely followed than futures by some traders, settled down $6.02, or 0.3%, at $1,926.22 on the day. Spot gold peaked at $1,937.54 on Friday – its highest since the $1,955.93 attained on April 25. Spot gold’s bigger target would be the March 10 target of $2,009.57.

Gold: Price Outlook

For a second week in a row, gold has closed above the $1,896 level, which marks a 61.8% Fibonacci retracement of the $2,070 high and the $1,614 low, said Dixit.

“Prices are getting consistent support from the 5 Week Exponential Moving Average, which signals bullish continuation,” he said.

“Going forth, a sustained move above $1,920 indicates presence of strong momentum and a sustained break above the recent high of $1,937.72 will be needed for an advance towards the next major resistance and target of $1,972.76, which marks the 78.6% Fibonacci level.”

Dixit, however, said a drop below $1,920 would indicate a consolidation towards the $1915-$1905-$1896 support areas.

“A sustained break below $1,896 will put the brakes on the current bullish momentum and a short correction towards $1,880 may then be witnessed.”



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