Energy & Precious Metals - Weekly Review and Calendar Ahead

By Barani Krishnan

Investing.com - Will commodity markets buy the U.S.-China story?

If Friday’s rally in oil suggests anything, it is that investors are beginning to feel confident that the pall hovering over markets for nearly 18 months from the trade war could finally be lifting, and it’s time to get long with natural resources as inflation could pick up from here.

Yet, if last week's rise in gold prices is taken into account, the narrative could be different.

While gold is part of the commodity universe, it serves a very distinct function that other raw materials don't.

Gold is a hedge to weak currencies and threats to the global economy, which includes the trade war.

The fact that the yellow metal did not sell off last week is a sign that investors want a continued hedge against the fear-factor called Donald Trump. The vacillating moods and ways of the U.S. president and what that could do to the second phase of the negotiations between the two countries is still a major wildcard for markets.

Crude oil prices hit three-month highs on Friday, with U.S. West Texas Intermediate breaching the $60 per barrel resistance long-eyed by oil bulls and U.K. Brent crossing the key $65 milestone, after Trump announced a limited U.S.-China trade deal with scant details.

The clincher of his so-called phase one deal was, of course, the president’s willingness to withhold new U.S. tariffs of 15% originally due from Dec.15 on $160 billion of Chinese-made goods that included iPhones, toys and other popular consumer products.

The Office of US Trade Representative, however, said it will maintain duties of 25% on $250 billion of other Chinese imports, and another 7.5% tax on a separate batch of products worth $120 billion, as the White House negotiates to sell tens of billions of dollars of US farm products a year to China.

The Chinese barely said anything. And that’s the problem: Without a televised signing, there was no way of knowing if the Chinese really agreed to everything Trump was saying or were just buying time, as political expediency seemed to be the essence here.

With Trump seeking re-election in 11 months, his focus appears to be on getting as many wins as possible as his Democratic rivals in Congress try to impeach him for alleged abuse of office. China’s President Xi Jinping is, meanwhile, under pressure to halt any more tariffs that could hurt the world’s second largest economy.

“With so much that has transpired in the past 17 months, markets expect precise details on what the two sides have agreed to in order to gauge the success of future negotiations,” said Adam Sarhan, founder and chief executive at 50 Park Investments, a global markets investment advisory service in Orlando, Florida.

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“The devil is really in the details and there’s very little of that here.”

Fawad Razaqzada, a London-based analyst at forex.com who specializes in gold and currencies, concurred.

“Negotiations for phase two deal will depend on the implementation of phase one deal,” Razaqzada said. “This could be another long, back and forth, type of a situation, keeping investors on their toes.”

With politics likely to influence the outcome more than any other factor, the Chinese also appear reluctant to give in too much now, when they might have a relatively easier process if a new U.S. president comes into office in 2021.

The fraught path ahead was reinforced by Trump’s tweet on Friday that phase two negotiations will commence immediately, instead of after the elections. The Chinese did not commit to a date.

“There are risks, both because of the general unpredictability associated with Trump’s diplomatic style, as well as the uncertainties that could arise from an altered approach in the event that Trump loses the 2020 presidential election,” Richard Anderson Falk, an international law professor and China expert at Princeton University, was quoted as saying.

“A Democrat in the White House would be sure to approach trade policy with China in a different manner, and somewhat more likely, in a manner that would make further progress in a rebalancing process more likely to be successful,” added Falk.

US-China aside, markets also have something else to chew on: Boris Johnson's landslide election victory that should finally pave the way for Brexit. The jury is still out on how much market upheaval could be expected even from an "orderly" U.K. exit from the European Union.

For what it’s worth, NYMEX-traded WTI, the U.S. crude benchmark, rose more than more than 1% on the week, settling at $60.45 per barrel. WTI had not seen $60 levels since the September attack on Saudi Arabia’s oil facilities that briefly knocked out about 5% of world supply.

WTI is also up nearly 9% for December, its strongest month since June. Year-to-date, the U.S. crude benchmark has risen nearly 32%.

ICE-traded Brent, the global oil benchmark, rose 1.6% on the week to settle at $65.22. Since the Saudi attacks, Brent had largely remained under $65. The global benchmark is up 4% on the month and 21% on the year.

Energy Review

Friday’s market showed that oil traders - and their headline-reading algorithms - appeared to have bought Trump’s China deal more than the traders and machines punting on the stock market.

While crude rallied without much restraint, stocks on Wall Street fell from early highs and closed just higher on lingering uncertainties about a 17-month trade war that had sparked hundreds of billions of dollars of tit-for-tariffs and often acrimonious remarks that weighed not just on the two economies involved but also world growth.

“Oil is probably catching up after playing laggard to Wall Street which had gone gung-ho in recent days on the hype over the likelihood of a trade deal,” said Sarhan, the CEO at 50 Park Investments in Orlando.

“With stocks, it’s a classic case of buy-the-rumor-sell-the-fact,” he said. “And that’s accentuated by the fact that there are scant details so far on this deal, and the devil is really in the details with something like this.”

Oil prices were weakened earlier in the week after a surprise rise in crude stockpiles and huge builds in gasoline inventories and distillates stocks.

Crude markets were also hit by the Paris-based International Energy Agency’s monthly report on Wednesday that said global inventories could rise sharply through March despite an agreement by OPEC and its allies to remove as much as 2.1 million barrels, or 2.1% from global supply, each day.

OPEC, in its own monthly report on Thursday, said it expected a small oil supply deficit instead for next year.

Energy Calendar Ahead

Monday, Dec 16

Genscape Cushing crude stockpile estimates (private data)

Tuesday, Dec 17

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Dec 18

EIA weekly report on oil stockpiles

Thursday, Dec 19

EIA weekly natural gas report

Friday, Dec 20

Baker Hughes weekly rig count.

Precious Metals Review

Despite Friday’s rally in oil, gold bulls seemed determined to show their disbelief that the China deal touted by Trump won’t do magic, sending up prices of the yellow metal that remained a hedge to the 17-month trade war.

Gold futures for February delivery on New York’s COMEX settled settled at $1,481.20 per ounce, up 1.1% on the week.

Spot gold, which tracks live trades in bullion, saw a final trade of $1,475.76.

Gold futures are up 0.3% so far for December and 15% for the year. Spot gold has risen 0.6% and 13% for the same periods.

“Gold bulls believe there are more unknowns than knowns with this trade deal and that’s why gold prices haven’t really fallen much in recent days,” said Adam Sarhan, chief executive at 50 Park Investments in Orlando, Florida.

Auto-catalyst metal palladium meanwhile continued its phenomenal run to close after overwriting gold’s all-time high on Thursday. The spot price of palladium came less than $20 of the $2,000 per ounce level targeted by fund managers before sliding on profit-taking.

Spot palladium hit record highs for a 16th day in a row on continued worries about the power crisis in South Africa that shut down mines in the world’s number two palladium producer.

Spot palladium saw last trade of $1,908.10 on Friday, after hitting an all-time high at $1,981.50.

Palladium futures for March delivery on Comex settled at $1,891.60, after setting record highs at $1,958.30.

Palladium futures are up 60% on the year while spot palladium has gained 51%, easily making the metal, which serves as a purifying agent for gasoline emissions, the best-performing commodity of 2019.