Commodities Week Ahead: Recession Fears Could Choke Oil, Keep Gold Steady

US recession rumblings and chart-based selling could keep oil under pressure till it breaks below $100-a barrel this week; then a wave of buying could see crude prices claw back most of what they had lost.

Since the Federal Reserve announced its largest rate hike in 28 years with a 75-basis point increase last week, traders have become convinced that the United States is headed for a recession from the combination of weakening macroeconomic data and super-sized monetary tightening to fight the worst inflation in 40 years.

Fed Chair Jerome Powell will return to Congress this week to make his case on why the central bank is doing what it’s doing and why that might result in an economic “soft-landing” and not a recession. Few, however, might be buying what he says.

“The ‘R’ word is being used more and more as recessionary winds start blowing more loudly through economic data and the price actions across the asset class spectrum,” said Jeffrey Halley, who oversees Asia-Pacific research for online trading platform OANDA. He added, musing:

“Even oil prices cracked under the weight of recession noise. A classic case perhaps, of high prices being the best cure for high prices?”

Crude prices plunged as much as 9% last week, their most since April, after US factory output fell for a fifth straight month as firms struggled with supply-chain bottlenecks and high costs, despite industrial production itself gaining.

In Monday’s Asian trading, oil rebounded, though not very convincingly.

New York-traded West Texas Intermediate, the benchmark for US crude, was up 70 cents or 0.7%, to $108.69 per barrel by 2:00 PM in Singapore (2:00 AM in New York). WTI lost just over $11 last week for its sharpest loss in eight weeks.

London-traded Brent crude, the global oil benchmark, was up 69 cents, or 0.6%, to $113.81. Brent lost almost $9 last week, its most in two months.

Just before last week’s tumble, WTI surged to a three-month peak of $123.18, its highest since the March run-up to almost $130 after Russia’s invasion of Ukraine. Brent reached $125.16, after its March peak of almost $140, which in itself was the highest in 14 years.

That price action seemed to back up what Halley of OANDA said: Higher prices could be curing oil’s already high prices.

Prior to the tumble, technical analysts have been warning for weeks that WTI and Brent prices were severely overbought as both crude benchmarks tacked on about $20 each over the past eight weeks.

Crude could be pressured further in coming days, they said.

“Price action in the just-ended week has confirmed the bearish DOJI pattern in WTI formed in the previous week,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“We saw a steep $15 drop in WTI from $123.66 to $108.25,” Dixit said, adding that stochastic readings of 54/65 on the weekly chart and 8/30 on the daily chart reinforced U.S. crude’s potential volatility and bearish mood.

He said a test of the $100 support for US crude could not be discounted.

He said WTI’s settlement below the 50-Day Exponential Moving Average of $109.83 was another bearish sign.

On the flip side, he said US crude could show a bounce back from the weekly middle Bollinger Band of $106 and retrace to the $113 - $116 - 119 levels.

“If that happens, sellers could again reactivate another round of pounding for the next leg lower, which is targeting the 200-Day Simple Moving Average of $101,” Dixit added.

Powell’s testimony to Congress on Wednesday and Thursday will lead speeches by other Fed officials this week. Each will be closely watched as markets try to gauge the size of the expected rate hike at the Fed’s upcoming July meeting.

Powell is expected to reiterate the Fed’s commitment to curbing inflation, which is running at the highest since 1981. The Fed on Friday said its commitment to fight inflation is "unconditional."

Powell said the Fed cannot control all the factors that contribute to higher inflation, like the war in Ukraine which has pushed up energy prices.

Market participants fear that the Fed’s aggressive rate hike path risks pushing the economy into recession. With signs of slowing growth and the S&P 500 already in bear-market territory, Powell may be pressed for more details on how the Fed can curb inflation without causing too many ructions in the economy and markets.

While the Ukraine invasion and subsequent Western sanctions on major energy exporter Russia had definitely exacerbated the global tightness in crude supplies, this year’s rally in oil was beyond the affordability of many poor consuming nations, say analysts.

In the United States, the best gauge of public burden from the rally was the pump price of gasoline, or petrol, which exceeded $5 a gallon for the first time since last week. Many pumps in the US, especially those in West Coast states like California, were selling at close to $6 a gallon, the American Automobile Association said. Diesel was even higher in California, at beyond $7 a gallon.

For this week, Tuesday’s data on the US existing home sales could show a slowdown in May as mortgage rates continue to rise. The United States is also scheduled to release numbers on new home sales on Friday with markets looking for signs of a bounce, after May’s 16.6% plunge.

Data on initial jobless claims will be out as usual on Thursday, with last week’s figures pointing to some cooling of the labor market although conditions remain tight. Preliminary data on manufacturing and services sector activity is also due out on Thursday.

In the case of gold, front-month gold futures for August on New York’s COMEX was up $4.80, or 0.3%, at $1,845.40 an ounce by 2:00 PM in Singapore.

On Friday, August gold on COMEX fell 0.5%, while for the week, it lost 1.9%.

Dixit of skcharting.com noted that the week-long price action in gold saw the yellow metal straddling through the $75 ascending rectangular channel formed after COMEX’s April high of $1,998 when the metal could not breach $2,000.

“Such ascending channels often tend to be bearish with potential for another drop if support is decisively breached,” he said.

Dixit also noted that the weekly price action indicated a bearish continuation of metal’s closed beneath the 50-Day Exponential Moving Average of $1,851 and the 100-Day Simple Moving Average of $1,845.

“A sustained move above $1,830-$1,840 will have potential for a short-term rebound to $1,850-$1,860, which is required to be cleared for the next resistance at $1,878,” said Dixit.

But a rejection from $1,850-$1,860 can push gold toward a retest of the $1,830-$1,820 that could extend toward channel support at $1,805, Dixit said.

“Any decisive breach of $1,878 or $1,805 will open a further $30-$75 move in the direction of breakout, either straight or in phases, depending on the trigger,” he added.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

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Written By: Investing.com