By Barani Krishnan
Investing.com -- Crude prices fell last week for a fifth week in seven over what analysts said were concerns that U.S. inflation was just not slowing as the Federal Reserve expected, to the extent that it was now affecting consumer sentiment and retail sales as well.
That may well be the case but the oil market was clearly not talking about the elephant in the room - i.e. the biggest geopolitical crisis to hit the trade in years, one with ramifications as important to energy as the Russia-Ukraine crisis itself.
We’re talking about the OPEC+ oil production cut - the size and, more importantly, timing of it - that has got the White House all miffed.
As Jonathan Panikoff, senior member at the Washington-based Atlantic Council, puts it, the decision by the Saudi-steered and Russia-supported oil-producing alliance to reduce output is probably not aimed just at President Joe Biden or the United States.
“But the manner in which it’s being implemented probably is - and it has the potential to be politically damaging for both the president and Democrats,” said Panikoff.
“The timing of the cuts - to take effect November 1, one week ahead of the US midterm elections - and their intensity, removing up to two million barrels per day from the market, probably reflect a willingness by Saudi Arabia to jab at Biden. Riyadh is not naïve about the US political landscape. OPEC+ almost certainly could have achieved its same overall goal but waited to act until shortly after the US midterms.”
That brings us to Panikoff’s analysis of the fundamental problem between the United States and Saudi Arabia: a relation that’s rife with misaligned expectations.
Saudi Crown Prince Mohammed bin Salman - a.k.a. MbS - continues to demonstrate his preference for global engagement that is transactional, similar to how both China and Russia generally engage in the world. The problem is, that’s not traditionally how Washington conducts foreign policy, preferring long-term strategic relationships.
MbS surely recognizes the broader global context of his decision-making. Riyadh’s support of the cuts reflects a conscious decision to actively support Moscow at a time when the world knows the United States is working to challenge Russia’s ability to successfully wage war in Ukraine, including by limiting capital available to Moscow from oil sales.
Inevitably, Riyadh will claim the cuts are in the best interest of Saudi Arabia, and that may be true. In the short term, a coming global recession might portend greater supply and risk pushing oil prices down further. In the long term, as global energy transitions away from fossil fuels accelerate, Riyadh might think that it only has so many years left of high oil prices to glean the revenue needed to reform its economy.
But even if that is Riyadh’s thinking, its behavior indicates a belief that it has nothing to lose on national security by aligning with Russia at this time. It’s true that if the United States makes a hasty and unwise decision to immediately withdraw its security umbrella from Saudi Arabia, Washington risks seeing Beijing fill that gap. On the other hand, Beijing has long been hesitant to play the role of security guarantor, and China cannot completely fill the hardware gap that would exist if the United States left—most prominently for missile defense, a field in which China is still developing its capabilities.
Riyadh may sincerely believe that the economic issues associated with oil prices are distinct from the security requirements for which it relies on the United States. But for Washington, economic security is very much core to national security. To that end, MBS needs to be careful. There are limits to how much the Biden administration is going to accept from a country that’s supposed to be a critical ally - even a transactional one.
Almost every U.S. president from the 70s to now - that’s Richard Nixon to Joe Biden - have had problems with the kingdom and its love child called OPEC (over the past six years, it’s been OPEC+ after the Saudis’ co-opting of Russia and nine other players into the wider group).
Many U.S. commanders-in-chief had vented about the Saudis and the oil cartel, but ultimately did nothing about both.
Donald Trump had mixed results though. Despite him and his son-in-law being as chummy as possible with the House of Saud, Trump often waged a gleeful ‘war’ of his own with the cartel through precision-guided drones (tweets) to get oil prices down. The post-Covid collapse of crude prices was, of course, a game changer for Trump, making him contrite enough to lend the combined forces of the Saudis and Russians a helping hand to put the oil market back together again.
Enter Biden in January 2021, and nothing has been the same since for the Americans and the Saudis. In fact, almost every month has been progressively worse for diplomatic ties and the supply-demand situation in oil (the president’s “pariah-state” comment against Riyadh over the Jamal Khashoggi killing not helping).
Biden’s maiden visit to the Saudi capital in July was unsurprisingly more disastrous, with the president telling MbS on his face, on Saudi soil, that he thought the crown prince was responsible for the killing. Hence, a 500,000 barrels-per-day production cut originally conceived as a “bridge-building” move by the Saudis in response to the visit ended up becoming an insulting 100,000-bpd at MbS’ order.
Biden has to realize that he’s not only butting heads with the source of the world’s most critical oil supply. He’s also up against a crown prince and energy minister (the latter being MbS’ half brother, Prince Abdulaziz bin Salman, or AbS) whose combined egos are probably greater than the dignity of the rest of the Arab world.
So, comes the question: What could the White House hope to achieve in a political reset with the Saudis?
With the midterm elections just weeks away, it’s hard to think of anything the administration could do at this point - other than to release more oil from the U.S. reserve - to bring crude prices lower.
On the contrary, prices could actually rise on the new turmoil that’s being created; though justice-seekers to Saudi extravagance would probably cheer. If MbS thinks it’s alright to give Biden a jab below the belt just before the elections, it’s probably not wrong either for the president to show the crown prince that he indeed has something below that belt to accuse him on his face of murder.
Diplomatically, given how well things are going, it would not be surprising if Saudi Arabia is classified next as a “state sponsor of terror” by the State Department for its allegiance with the Kremlin (sounds like the Iranians might suddenly have company).
A withdrawal of arms deals could (or would most likely) follow.
To that end, Panikoff says, the bigger question is whether European Union countries would try to jump in to fill the military hardware gap instead, just as Dassault Aviation - the French Rafale jet manufacturer - came to an agreement with the United Arab Emirates to sell its jets shortly after Abu Dhabi called off the deal to purchase the US-made F-35. “If so, it will undermine U.S. leverage to redefine the contours of its relationship with Saudi Arabia; if not, the United States will have to decide whether it’s going to try to compel Riyadh to re-engage with Washington in a strategic manner or accept a more transactional relationship,” Panikoff said.
But back to the question of why the oil market is surprisingly desensitized to the incredibly tense U.S.-Saudi backdrop.
Some say it’s because such a showdown is quite unprecedented - with none of the OPEC-related crises of the past 60 years coming this close to rewriting the rules of political and diplomatic engagement between two of the world’s most important allies.
“Simply put, oil traders do not know how to react at this point as no one knows for sure how this is going to go,” said John Kilduff, partner at New York energy hedge fund Again Capital. “But one thing’s for sure: It’s not going away. So grab your popcorn, raise your recliner to your favorite position and release the pause button on your OPEC+ TV, for what is to come.”
Oil: Market Settlements and Activity
Crude prices were down as much as 7% on the week, giving back about half of the past two weeks’ gains, after latest readings for U.S. retail sales and consumer price inflation showed the Fed was barely winning in its year-long battle against price pressures.
“The global growth outlook remains a major downside risk, also,” Craig Erlam, analyst at online trading platform OANDA, said, pointing to new lockdowns in China, the world's largest crude oil importer, which has been fighting COVID flare-ups after a week-long holiday.
“With labor markets remaining tight and inflation stubborn, further downgrades could be on the cards,” Erlam added.
New York-traded West Texas Intermediate crude did a final print of $85.55 per barrel, after settling Friday’s official session down $3.50, or 3.9%, at $85.61. For the week, WTI was down just over 7%. U.S. crude benchmark rose 17% over two prior weeks, in a powerful start to October, after a 12.5% drop in September and 24% loss for the third quarter.
London-traded Brent oil put in a final print of $91.64, after settling Friday’s session down $2.94, or 3.1%, at $91.63. Brent had risen 13% over two prior weeks. The global crude benchmark was down 11% in September and dropped 22% in the third-quarter.
Oil: Price Outlook
So, where are U.S. crude prices headed, at least technically?
According to Sunil Kumar Dixit, chief technical strategist at SKCharting.com, the previous week's strong rebound in WTI could not keep pace in the latest week, stopping short of the weekly middle Bollinger Band of $96 as it faced selling pressure at $93.64.
“If WTI has any plans to continue grinding higher above $96 , short term support $81 needs to be respected, failing which 100 week SMA $78 can be revisited,” Dixit said.
“If selling extends below the daily middle Bollinger Band $84.75 , we can see a correction towards $82.60.”
Gold: Market Settlements and Activity
The dollar is stealing every bit of safe-haven shine out there, leaving gold - the original precious metal - with very little luster.
Gold’s benchmark futures contract on New York’s Comex, December, settled at $1,648.90 an ounce, down $28.10, or 1.7%, on the day, after a session low at $1,646.15. For the week, it lost just over $60, or 3.5%.
The spot price of bullion, which is more closely followed than futures by some traders, was at $1,645.24 by 14:00 ET (18:00 GMT), after a midday tumble to $1,640.71.
Investing.com data showed the weekly drop in gold was the metal’s worst since a near 4% drop during the week of early August.
Gold broke below key $1,650 support on Thursday before bulls in the space lucked out, as the dollar’s tumble on talk of peak-inflation in the U.S. helped the yellow metal recoup virtually all that it lost on the day.
Gold’s selling, however, resumed Friday as the Dollar Index rose for a seventh time in eight days. The index, which pits the dollar against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, reached a session high of 113.30. Technical charts indicated a very likely 120 high for the Dollar Index, said analysts.
Bond yields benchmarked to the 10-year Treasury note, meanwhile, rocketed to a 14-year high of 4.06%.
The dollar and yields have been chief beneficiaries of the Fed’s campaign against inflation as the central bank hiked interest rates by 300 basis points this year and looks set to add another 125 before the year-
Gold: Price Outlook
Said SKCharting’s Dixit: “Seven months of consistent bearish streak means few love gold enough to buy it,
In other words, there are more people selling gold than buying it. Another interpretation is that such a one-sided bearish trade mostly occurs in situations where markets are net long.”
He said monthly action on spot gold indicates the metal may continue to extend declines towards $1,630-$1,615. “If this zone of support fails, then a further drop to $1,600-$1,585 could be expected. At a point of time, the much touted $1,560 (50% Fibonacci retracement of $1046 -$2073) can be tested.”
Dixit said bearish sentiments were likely to continue haunting gold as long as it remained beneath the $1665-$1685 minor resistance zone, while a bigger rejection point of $1,730-1,735 remains a decisive challenge.
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.