Commodities Weekly: Putin Shows OPEC Who’s Boss; Trump-Xi Truce to Hit Gold

By Barani Krishnan

Investing.com – Could oil finally be on a clearer, albeit bullish, path? It appears so, with Russia and Saudi Arabia deciding to extend production cuts for another six to nine months, and the U.S. and China agreeing to their second tariffs ceasefire in six months to resolve their more than year-long trade war.

Crude futures still have to deal with weekly U.S. data stockpiles data though. And then there’s the U.S.-Iran faceoff, with Tehran warning its European allies that without a deal to freely export its oil again, it will continue enriching uranium -- coded language for “we might build that nuclear bomb someday”.

Even so, both elements could be supportive to oil in the near-term. If last week’s U.S. crude drawdown of nearly 13 million barrels is indicative of immediate demand, bulls could have the upper hand here. And the EU looks powerless for now to broker peace between the Trump and Rouhani administrations.

Gold, meanwhile, is looking at markedly different fundamentals from those that propelled it to 6-year highs recently. With tamped down expectations for a meaningful Federal Reserve rate cut, and Wall Street to the oil market likely in risk-on mode, there could be little safe-haven appetite to sustain gold at above $1,400 an ounce.

Energy Review

OPEC meetings are the epitome of drama: the world’s most powerful oil ministers in a closed room, discussing -- or more likely, arguing -- on pricing/production strategy for their precious hydrocarbons, while journalists fill the corridors, calling in every valuable nugget of information leaked to them as breaking news. Not this time, though.

The July 1-2 meetings of the Saudi-led OPEC and Russia-headed OPEC+ might be reduced to a yawn because of one man: Vladimir Putin.

The Russian president took almost all the importance, uncertainty and stress out of the typically newsy a1nd highly-strung event by announcing on Saturday itself at the G20 Summit in Osaka that he had agreed with Saudi Arabia’s Crown Prince Mohammed bin Salman that OPEC+ will roll forth its previously agreed production cut of 1.2 million barrels per day through December or March. The previous pact was officially set to expire this month.

In one fell swoop, Putin showed OPEC -- and those watching the cartel -- who really makes its most important decisions.

OPEC announcements are typically delivered by Saudi Arabia’s energy minister or the organization’s secretary-general. In pre-empting them, Putin, whose country doesn't even have an official role in OPEC, has placed himself at the apex of the cartel, with MbS, the Saudi crown prince, just beneath him.

And since the OPEC+ pact the Russian president announced is basically a rollover of a previous deal, it doesn't change anything for the non-participants in the arrangement, particularly Iran.

This is important because Iran, angry with its OPEC brethren, namely the Saudis and the Emiratis, for siding with the U.S. in blocking its oil exports, might have tried to cause divisions at next week's meetings if not for the preemptive deal between Putin and MbS.

Tehran also hates the fact that OPEC has turned into a Saudi-UAE-Russian club that has shut out other legitimate voices in the 14-member organization. Qatar, another archrival of the Saudis, quit OPEC precisely for this reason last year.

Although Iran, as one OPEC's five original founding members, decided to stay, there isn't much it can do to shake up the present situation. When Saudi Energy Minister Khalid al-Falih deliberates for the record the agreement reached by his crown prince and the Russian president with the rest in the room, no dissenting voices are expected.

Politics aside, the most pertinent question is where oil prices will be next week. U.S. West Texas Intermediate crude could reach $60 or more a barrel, returning toward the 2019 high of $66.60 hit in April. U.K. Brent has a longer way to go in recapturing its $75.60 peak from April, though closing in on $70 wouldn't be impossible.

Energy Calendar Ahead

Monday, July 1

OPEC Meeting

Tuesday, July 2

OPEC+ Meeting
American Petroleum Institute weekly report on oil stockpiles.

Wednesday, July 3

The EIA weekly report on oil stockpiles.

Thursday, July 4

EIA weekly natural gas report

Friday, July 5

Baker Hughes weekly rig count.

Precious Metals Review

Until last week, gold bulls were in rapturous delight, riding the crest of speculation that the Federal Reserve will agree to a 50 basis points cut rate by July.

Those lofty rate cut expectations were tamped down early this week by Fed Chairman Jerome Powell and his senior colleague James Bullard, who telegraphed in their speeches to the market that they might be considering a 25-bp snip at most.

If that wasn’t enough, Saturday’s meeting between presidents Donald Trump of the U.S. and Xi Jinping of China could turn the very premise of a rate cut on its head. The Fed said last month that it will watch economic events to decide if an easing was needed.

As of Friday, Investing.com’s Fed Rate Monitor Tool showed a 100% chance of a rate hike by June. That was, of course, before the Trump-Xi talks the next day.

The culmination of the Fed position comes after a year of pressure for a rate cut by Trump, who’s cajoled, berated and even considered firing a defiant Powell. The Fed chief said earlier this week he won’t sacrifice the central bank’s independence for politics or short-term gains.

It’s too early to tell if Trump and Xi will sign a trade deal after this, or go back to slapping each other with more tariffs.

But the fact remains that Trump, who started out pushing for a rate cut in order to prop up the stock market to help his re-election, may get the protracted Wall Street rally he wants -- though he may have also allowed the Fed more pause on a rate change with his China truce.

To sum up, spot gold, which peaked at $1,438.99 on Tuesday and slipped to $1,409.50 by Friday, could reach $1,385 or below next week.

Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, peaked at $1,433.30 on Tuesday before Friday’s last trade of $1,412.50. Technical charts show a drop to $1,390 and below next week.

Precious Metals Calendar Ahead

Monday, July 1

China Caixin manufacturing PMI (Jun)
FOMC Member Clarida Speaks
ISM manufacturing PMI (Jun)

Tuesday, July 2

RBA interest rate decision
FOMC Member Williams Speaks

Wednesday, July 3

ADP) nonfarm payrolls (Jun)
Initial Jobless Claims
U.S. trade balance (May)
U.S. factory orders (May)
ISM non-manufacturing PMI (Jun)

Thursday, July 4

U.S. market holiday

Friday, July 5

U.S. nonfarm payrolls (Jun)

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