Commodities Week Ahead: Tiny OPEC+ Cut Could Make Oil Vulnerable; Gold Up 

A meaningless production cut by OPEC+ could leave oil bulls vulnerable again this week as the peak US summer driving period winds to a close and the dollar continues making 20-year highs.

Those in gold will likely seek support at the $1,730 an ounce level as the yellow metal stages a technical rebound from the $1,600 territory visited last week.

Crude rallied as much as 3% in a knee-jerk reaction to OPEC+’s announcement on Monday that it would cut output by 100,000 barrels per day in October. The move came amid thinner-than-usual trading volumes on the Labor Day holiday that saw the market’s upside stretched by momentum rather than clear thinking.

Barely 24 hours later, crude prices were coming off their highs as traders realized that OPEC+ was merely planning to roll back on paper the same 100,000 bpd production increase that it announced a month earlier. 

OPEC+ consists of the original 13 members of the Saudi-led Organization of the Petroleum Exporting Countries and 10 other oil-producing allies steered by Russia.

By Tuesday’s Asian trading, however, analysts had taken to calling the production cut 'symbolic'—precisely what it was—as it became clear that it had been forced by elements within OPEC+, hanging onto Saudi Arabia’s hint from two weeks ago, that a reduction was probably necessary to restore some upside to a market that had lost 32% from March’s highs.

New York-traded West Texas Intermediate, the benchmark for US crude, hovered at $89.09 per barrel by 04:05 ET (08:05 GMT) versus Monday’s session high of $90.37. WTI tumbled 6.7% last week.

Brent, the London traded global benchmark for oil, was at $95.55 versus the previous session’s peak of $96.99. Brent lost 6.4% last week.

Warren Patterson, head of commodities strategy at ING, said of the proposed OPEC+ production cut:

"While the headline number is for a 100 mbbls/d cut, in reality, the actual cut will be much smaller .... Most producers have not been able to hit their targets and are producing quite some distance below where they should be.”

Balancing, or rather 'supporting,' the OPEC+ action was Noah Barrett, research analyst for energy and utilities at Janus Henderson Investors, who said in another note:

The cut "indicates that OPEC+ is watching demand very closely and is trying to manage supply to keep a floor on oil prices.”

The reality is that with the end of the peak US summer driving period, consumption numbers for crude as well as fuel products could stall despite robust demand at pre-pandemic highs now. 

The fledgling US recession and potential for a deeper slowdown across Europe, along with the lockdown of 70 Chinese cities impacting more than 300 million people, are also expected to weigh on oil demand.

Oil traders are also watching for any remote possibility that the Iran nuclear deal could be revived to unlock US sanctions that could allow up to a million barrels of oil from the Islamic Republic to be legitimately exported on the global market.

The White House made clear on Friday that there had been no agreement as yet to revive the nuclear deal. The EU’s chief diplomat Josep Borrell also said on Monday that efforts to strike an agreement on the deal were “in danger” after the US and Iranian positions diverged in recent days.

While the latest developments on Iran may be favorable to oil bulls, there’s also the relatively strong US jobs report for August from Friday that could embolden the Federal Reserve to carry out its third straight 75 basis point rate hike on September 21. That sent the Dollar Index to 20-year highs of 110.26 in Monday’s session, making the US currency a greater safe haven than gold.

Besides that is the agreement by the Group of Seven finance ministers on Friday to cap the price of oil sold by Russia. While Moscow has vowed retaliation against countries that implement the decision, it is also likely to undercut other OPEC+ producers in selling its oil wherever possible to make up for lost revenue. Russia’s aggressive discounting on oil on the physical market will ultimately matter on the futures market,  aside from weighing on the pricing of competing OPEC+ oils, including Saudi crude.

Gold prices recovered sharply from a six-week low on Tuesday as a worsening energy crisis in Europe drove up safe-haven demand, while copper extended gains on expectations of more Chinese stimulus measures.

Demand for conventional safe havens rose after Russia shut a major gas pipeline to Europe, putting the continent at risk of a major energy crisis. But the 20-year highs in the dollar could also weigh on gold.

The benchmark gold futures contract on New York’s COMEX, December, was at $1,726 per ounce, up $3.40, or 0.2%. December gold slid 1.6% last week, adding to the back-to-back slide of 0.7% and 2.9% in the last two weeks. Gold futures have also fallen six months in a row since their last positive close of $1,954 in January, losing almost 12% in that stretch. 

The spot price of bullion, which is more closely followed than futures by some traders, was up $4.86, or 0.3%, to $1,715.48.

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: Barani Krishnan