The writing has been on the wall of oil trading exchanges for a few weeks and is working its way onto price screens now: US crude testing $50 per barrel.
Regardless of what the truth is, in oil traders’ minds is the picture of a Saudi Arabia cornered into ensuring US President Donald Trump the high crude output and low prices he wants in order to secure his help in avoiding sanctions over the murder of journalist Jamal Khashoggi.
In that sense, the market may have already decided that the December 6 meeting of the Saudi-led Organization of the Petroleum Exporting Countries (OPEC) would be a non-event.
Oil’s $50 Support Looks Set To Crack
WTI Weekly Chart
US West Texas Intermediate (WTI) crude came within cents of breaking below $50 on Friday, hitting a 13-month low at $50.16. WTI has lost about 35 percent from a four-year high of nearly $77, hit in October, and is poised to end November down 23 percent, the biggest monthly loss for the commodity since October 2008.
Meanwhile, UK Brent the global benchmark for oil, broke below its $60 support for the first time since July 2017. Brent is now down 32 percent from a four-year high of nearly $87, reached in October.
Both benchmarks were up about 1 percent in Monday’s early trade, with traders largely pessimistic the gains would last.
Trump Tweets Preempt Production Cuts
Typically, in an oversupplied market, OPEC would cut output. Until a couple of weeks ago, the Saudis did seem determined to slash about 1.4 million barrels per day (bpd) from global production with the help of OPEC+, which includes non-member Russia. But Moscow wasn’t happy to cut that much.
Then Trump began tweeting that there should be no cuts at all. The president has since publicly thanked the Saudis, ahead of the OPEC meeting, for keeping prices low: discouraging Riyadh from acting to the contrary, particularly as the Khashoggi issue heats up again.
Saudi Arabia has admitted that Khashoggi’s murder, carried out at its embassy in Turkey, was premeditated. But it denies any involvement by Crown Prince Mohammed bin Salman, the heir to the throne, who was the target of the journalist’s criticisms.
Several senators from Trump’s own Republican party on Sunday rejected his defense of Saudi Arabia over the Khashoggi affair, with some saying Congress must take additional action.
Saudi Arabia Under Pressure From Hostile Politics
A pair of Republican and Democratic senators has invoked the Global Magnitsky Act, which enables sanctions over human rights offenses, to force Trump to formally state, within a few months, whether he believes Mohammed bin Salman was responsible for Khashoggi’s death.
A bipartisan effort is also calling for additional sanctions on Saudi Arabia and others thought to be fomenting unrest in Yemen, and to stop the sale and transfer of all weapons to Saudi Arabia until the Yemen campaign is scaled back.
Hostile politics isn’t Saudi Arabia’s only problem.
Roaring Crude Output Doesn’t Help
US crude production is at record highs, hitting 11.7 million bpd, making it the world’s largest oil producer. Domestic stockpiles of crude have swelled above 50 million barrels the past nine weeks and are forecast to rise for a tenth this week. And there are nearly 19 percent more rigs actively drilling for oil in the country this year than last year. Saudi and Russian outputs are also at all-time highs, at about 11 million bpd each.
Worsening the fundamental picture is the expected slowing of many regional economies next year. Dominick Chirichella, director of risk at Energy Management Institute in New York, said:
“With the market now pricing in a global economic slowdown based on the way equities have been trading, OPEC could see demand growth slowing on top of the ongoing growth in supply from places like the US.”
Gold Could Test $1,250
Gold could be in for a decisive week with important market cues coming from the Federal Reserve and a host of economic data.
Gold Daily Chart
The yellow metal could also likely test gold bugs’ long-desired target of $1,250 if Wall Street suffers another woeful week after three straight weeks of decline that have made for the worst Thanksgiving performance since 1939.
US gold futures hovered at $1,230 per troy ounce in Monday’s early trade.
Fed Chair Jerome Powell presents a speech on the “The Federal Reserve’s Framework for Monitoring Financial Stability” at the New York Economic Club on Wednesday. While a potentially high-volatility event for markets at any time, Powell’s words are also being pointed to by Trump as a key catalyst for this year’s equities rout. The president added an additional blow on Friday by blaming Secretary Steve Mnuchin for appointing the Fed chair.
Powell’s speech aside, the Fed will also be issuing minutes of its November 7-8 meeting on Thursday.
The central bank is widely expected to raise US interest rates for a fourth time this year at its December meeting, and this week’s Fed events are expected to be scrutinized closely by investors for cues on gold market direction.
Other major US data for the week would be the CB Consumer Confidence index on Tuesday; GDP estimate for the third quarter and new home sales, on Wednesday; pending home sales, personal income and spending over the remainder of the week.
On the European side, there’s ECB President Mario Draghi’s speech, eurozone unemployment and inflation and China manufacturing and non-manufacturing PMI.