Energy & Precious Metals – Weekly Review and Outlook By

By Barani Krishnan – The Randy Newman song ‘You’ve Got a Friend in Me‘ could well be the backdrop for the historic U.S.-China summit that opens Monday at the G20. Xi Jinping once called Joe Biden “my old friend” and the U.S. President responded with a similar endearment.

Lately, however, Biden called Xi “a thug”, after China made clear that not even the United States could stand in its way of acquiring Taiwan. Despite such adversity, White House officials are counting on the one-time personal connection between the two men to resurface at the summit and lead to Sino-American cooperation in areas with common goals. In fact, Xi might already be assisting a Biden goal in the strangest way possible: Low oil prices via China’s Covid-zero (or alternatively zero-Covid) policy.

Unless you’ve been living under a rock, there’s little chance that you’d have missed the almost daily headlines on the Xi administration’s whack-a-mole way of dealing with the coronavirus now, three years after the virus had its first outbreak in the Chinese city of Wuhan.

Using snap lockdowns, mass testing, extensive contact tracing and quarantines to stamp out infections as soon as they emerge, the Covid-zero policy has taken a heavy toll on the world’s number two economy and led to angry backlashes from its people.

Thus, Friday’s move to reduce the quarantine period for travelers in China, along with the scrapping of a restriction on international flights, appeared to be a compromise by Beijing to appease a population that had become weary of one lockdown after another – a phenomenon no longer happening in any other country.

Many suspect Xi ultimately has no intention to do away with the policy – a conviction arising not just from his renewing of his no-Covid vow when he was sworn in for a historic third term as president.

Some say China’s reasons for the policy go beyond health – into the territory of national pride, for instance.

Beijing relies entirely on home-grown vaccines for Covid – which, according to experts interviewed by Western media, aren’t as effective as globally-trusted brand names such as Pfizer, Moderna Novavax, and J&J.

A Hong Kong study cited by Barron’s suggests that Chinese-produced Sinovac needs three injections to provide equivalent protection to Pfizer and Moderna’s vaccines. Sufficient data to disprove this is difficult to come by, as China keeps a tight lid on information-sharing.

Beijing is now trying to develop its own mRNA vaccine, similar to Pfizer and Moderna’s, but it’s fallen far behind as a result, media reports have said.

Others cite pure financial or economic reasons, saying pandemic-emergency responses limit any sort of run on Chinese banks and allow Beijing to bypass U.S. sanctions on Russian oil to buy limitless amounts of this at rock-bottom prices.

China saved about $3 billion in buying Russian oil versus other imports between April and July, according to Reuters’ calculation based on customs data. On average, China paid about $708 per tonne for Russian crude while the value of imports from the rest of the countries was $816 per tonne.

Biden, of course, doesn’t give a rodent’s rear to what China is doing to fight Covid; how many Chinese are in undeserved lockdowns and whether local vaccines will save them or cause irreversible damage over time (sorry for the bluntness).

But if the sum of all actions by Beijing brings the price of oil down, we can assume the U.S. president will be happy.

China is the world’s largest importer of crude: last year, it imported 11.8 million barrels per day, outpacing the United States, which takes in 9.1 million barrels per day.

Back in May, the oil price rally came to a screeching halt after Beijing adopted a zero-Covid strategy and announced strict containment measures that included major lockdowns. But the restrictions also had a severely negative impact on Chinese consumer demand and manufacturing output.

According to year-on-year (y-o-y) figures for April, retail sales fell by 11.1%, industrial production by 2.9% and manufacturing by 4.6%. Meanwhile, the and the Currency Index both fell in tandem in April.

In the past two weeks, as OPEC+ – the Saudi-led and Russia-assisted global oil producing alliance – got down to observing a 2 million-barrels-per-day output cut, China’s Covid-zero policy was back in the headlines. Brent crude came within cents of revisiting $100 a barrel on Monday before tumbling 6% on the week. The oil market’s drop came after reports of an explosion in new Covid cases in China’s export-heavy Guangdong province raised fears that the authorities could reintroduce tough Shanghai-style lockdowns instituted earlier this year.

The People’s Bank of China, or PBOC, is still acting cautiously due to concerns about further yuan weakness, which can potentially trigger large capital outflows in a Fed rate hiking cycle. The yuan and corporate bond yields fell sharply after the PBOC announced a cut in banks’ reserve requirements in mid-April. Since then, the currency has stabilized, but bond yields have started climbing again. Net debt issuance by the government clocked in at more than 700 hundred billion yuan ($104 billion) in both May and June, the two highest monthly totals since mid-2020, and more liquidity will be required from the PBOC if the rapid clip of local government debt issuance is going to continue.

Beijing will now be forced to either bring forward a larger part of next year’s planned quota or take other strong measures to bolster local government finances. It can also allow more off-the-book borrowing by city governments, although that would be difficult due to high bond yields. Unless Chinese policymakers act to sharply bolster local government finances and the PBOC is willing to risk more yuan depreciation, a weak rebound in the second half of the year is seen as the most likely scenario.

There are now growing signs that the Chinese economy may be entering a prolonged era of slow growth.

The world’s second-largest economy is projected to grow just 2% this year, significantly lower than the above 6% it maintained over the past decade.

Maintaining a Covid-zero policy has been slowing the economy and adding huge additional costs to the government budget, leaving Beijing in a dilemma about whether to boost debt or tolerate weak economic growth.

Even before the spending pressures brought on by the pandemic, the Chinese economy was in trouble, most notably due to a slump in land sales revenue amid a housing slowdown, compounded by tax relief to businesses that cut government income. Official data shows the wide-ranging budget deficit reached a record nearly 3 trillion yuan ($448 billion) in the first five months of the year.

China is still facing severe economic uncertainty, and oil imports are one barometer.

All these are taking a toll on China’s demand for crude.

OPEC itself has predicted that Chinese buying of oil will decline by 60,000 barrels per day this year, after forecasting an increase of 120,000 bpd only a month ago thanks to new lockdowns. OPEC has cut its demand growth view for 2022 by 460,000 bpd to 2.64 million bpd and for 2023 by 360,000 bpd to 2.34 million bpd, citing “the extension of China’s zero-Covid-19 restrictions in some regions, economic challenges in OECD Europe, and inflationary pressures in other key economies.”

Inflation has been the proverbial albatross around Biden’s neck all year prior to October, with more than 80% of Americans polled before this month’s midterm elections citing concerns about high gasoline and energy prices. If China can somehow keep oil prices from escalating and driving inflation back towards June’s 40-year highs, that will work splendidly for the U.S. president.

Summer-time record highs of $5 a gallon for gasoline were what drove Biden to drain nearly half of America’s emergency oil reserve. Now, having brought a gallon to well below $4, the president has to think of a way of refilling the reserve. If China’s Covid-zero policy can keep a barrel from revisiting the much-feared $100-and-above-a-barrel, Xi will be a friend indeed.

Oil: Market Settlements and Activity

Crude prices climbed out of a three-day hole as U.S. inflation at 9-month lows suggested the Federal Reserve could do a in December that could benefit businesses as a whole, including oil drillers and refiners.

Most commodities rallied strongly between Thursday and Friday on the prospect of the Fed rate pivot. But the rebound in oil on the day wasn’t enough though to prevent the market from posting a weekly loss.

“It’s been quite the volatile week for oil, with Chinese rumors [over Covid] not going away, [and] restrictions and mass testing being undertaken once more,” said Craig Erlam, analyst at online trading platform OANDA.

New York-traded , or WTI, for delivery in December did a final trade of $88.86 per barrel on Friday after settling the official session at $88.96, up $2.49, or 2.9%, on the day.

WTI, however, ended the week down 6.6%, after two back-to-back weekly wins of about 5% and 3.5%. The decline was mostly due to a net drop of 7% between Monday and Wednesday.

London-traded for January did a final trade of $95.78 after settling Friday’s session at $95.99, up $2.32, or 2.5%, on the day. For the week, the global crude benchmark fell 2.6% after gains of about 3%, 2.5% and 2% over the three prior weeks.

Oil Price Outlook: WTI

WTI’s inability to rebound from its losses for the week denotes larger problems for the U.S. crude benchmark, says Sunil Kumar Dixit, chief technical strategist at

“WTI’s weekly Relative Strength Indicator at 47 is below neutrality while its weekly stochastics at 59/59 also favors neutrality and awaits triggers,” said Dixit.

For the week ahead, if WTI fails again to clear the 50-week Exponential Moving Average of $90.60 and the weekly Middle Bollinger Band of $90.90, it will stay under bearish pressure, with 84.70 likely to be retested and prices can drop further to 100 week SMA 80.80.

On the flip side, accumulation of momentum above 80.80 followed by a revival above 91.00 will witness another return to a bullish channel that aims 97 and 105 in the mid-term.

Gold: Market Settlements and Activity

Gold bulls had their biggest week in 30 months as their two biggest tormentors – the dollar and cryptos – were vanquished this week.

U.S. gold futures’ benchmark contract did a final trade of $1,774.20 an ounce on Friday, after settling the official session at $1,769.40 – up $15.70, or almost 1%, on the day on New York’s Comex.

More importantly, it rose $92.80, or 5.5% on the week – its most since a 6.5% jump during the week to April 3, 2020.

The , which is more closely followed than futures by some traders, settled at $1,771.42 an ounce, up $15.81, or 0.9%.

Gold has rocketed since Thursday as U.S. inflation registered its slowest annual reading in nine months, heightening speculation that the Federal Reserve will back off from the aggressive rate hikes it has executed since March, sending the dollar crashing.

The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, was down 4.1% on the week, its most since a 4.8% weekly drop in March 2020.

Cryptocurrencies, meanwhile, are in a crisis of their own after industry leader fell over 20% on the week as crypto-exchange FTX headed for bankruptcy.

Gold is probably winning at least some of the money that had exited cryptocurrencies this week, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

“There’s no hard data to corroborate fund flows from crypto into gold now but I’d be surprised if that isn’t happening,” Streible said.

“Normally, it’s the other way round as gold seldom finds love from the crypto crowd. But gold looks relatively safer now than digital currencies and imagine it has gained new respect that could mean higher allocations that may have been meant for crypto.”

Erlam joins a legion of analysts around the world who expect gold to get to $1,800 at least after clearing resistance at between $,1770 and $1,780.

“Gold bulls have been waiting for this week for a long time: a week (or so) in which the Fed signaled a potential slowing of rate hikes and the CPI data displayed a significant and broad-based decline,” Erlam said.

The CPI, or , registered in October its slowest annual growth in nine months, expanding just 7.7% over a 12-month period, versus a growth of 8% forecast by economists and against the previous yearly growth of 8.2% to September.

Gold: Price Outlook

Seven months of relentless beating and being pushed to the wall seemed enough for gold bulls, who are now fighting back, said SKCharting’s Dixit who tracks bullion’s spot price.

“We’ve seen multiple drops in spot gold since the first quarter, and each time $1,615 came to support the metal,” Dixit said. “Gold bulls seem to be saying ‘don’t take us for granted’ this time around.”

Dixit said oversold monthly stochastics supported by divergence in weekly stochastics led to a decisive price breakout in gold, at above the previous month’s high of $1,730.

The short-term trend also turned bullish, testing the 50-week Exponential Moving Average of $1,771.70, he said.

“The short-term bullish rebound is very likely to test the monthly Middle Bollinger Band of $1,797 and the 200-Day Simple Moving Average of $1,804, which is 100-week SMA as well.”

Dixit cautioned about the possibility of correction as the daily Stochastics and the Daily Relative Strength Indicator reach overbought conditions, respectively at 99/93 and 70. This can cause spot gold to pull back towards support areas of $1,750 and $1,730, he said.

“Whatever bearish pressure descends on gold now, the short-term trend turns bullish if traders interpret the pullback as a means to execute value buying,” said Dixit. “If gold gains acceptance above $1,805 as a result of this, expect the next targets to be $1,850 and $1,875.”

Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.

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