Early Week Surge and Mid-Week Pullback

Silver began last week with strong gains, fueled by factors such as U.S. interest rate cut expectations, China’s economic stimulus, and geopolitical tensions. This momentum propelled silver to an 11-year peak. However, the rally lost steam as traders engaged in profit-taking following the release of hawkish Federal Reserve minutes. Economic data released on Thursday further supported the likelihood of delayed rate cuts, contributing to the swift retreat in prices.

Inflation Report in Focus

The upcoming release of the core personal consumption expenditures (PCE) price index on Friday is garnering significant attention. As the Federal Reserve’s preferred inflation gauge, its results could heavily impact silver prices. Historically, silver acts as a hedge against inflation, but its appeal diminishes when interest rates rise, increasing the opportunity cost of holding the metal.

Technical Analysis and Market Sentiment

If U.S. economic data continues to exceed expectations, silver prices may face further declines. Recently, bullish sentiment has weakened, with some investors liquidating positions or turning bearish. This shift is influenced by the Federal Reserve’s commitment to maintaining higher interest rates for a prolonged period.

Fed’s Outlook and Market Reactions

Minutes from the Federal Reserve’s latest meeting indicated that reaching the 2% inflation target might take longer than anticipated. This has moderated market expectations for rate cuts, with traders now assigning only a 62% probability of a rate reduction by November 2024, according to the CME FedWatch Tool.

Market Forecast

Given the current market situation, the outlook for silver remains cautious. While technical indicators suggest room for a downside correction, the upcoming inflation report and ongoing economic data will be pivotal in determining short-term price movements. Traders should prepare for potential volatility and monitor key support levels closely.

Technical Analysis

At 09:18 GMT, XAU/USD is trading $2344.66, up $10.66 or +0.46%.

Inflation Report in Focus

The upcoming release of the core personal consumption expenditures price index (PCE) on Friday has the market’s attention. This index is the U.S. Federal Reserve’s preferred inflation measure and its results could significantly influence gold prices. Historically, gold serves as a hedge against inflation, but the appeal of non-yielding gold diminishes when interest rates are higher, as it raises the opportunity cost of holding the metal.

Technical Analysis and Market Sentiment

Technical indicators suggest gold might drop further into the $2,313.07 to $2,277.34 range, potentially triggering a technical bounce. However, if U.S. economic data continues to outperform expectations, the decline in gold prices may extend. Recently, bullish sentiment has waned, with some investors liquidating positions or turning bearish. This shift is influenced by the Federal Reserve’s persistent stance on maintaining higher interest rates for an extended period.

Fed’s Outlook and Market Reactions

Minutes from the Federal Reserve’s latest meeting indicated that achieving the central bank’s 2% inflation target could take longer than anticipated. This has tempered market expectations for rate cuts, with traders now predicting only a 62% chance of a rate reduction by November 2024, according to the CME FedWatch Tool.

Market Forecast: Bearish Outlook

Given the current market conditions and the Federal Reserve’s stance, the outlook for gold remains bearish in the short term. The potential for further interest rate hikes and strong U.S. economic data could continue to pressure gold prices downward. Traders should remain cautious, as the upcoming inflation data could trigger further volatility in the market.

Crude Oil is a naturally occurring liquid fossil fuel resulting from plants and animals buried underground and exposed to extreme heat and pressure. Crude oil is one of the most demanded commodities and prices have significantly increased in recent times. Two major benchmarks for pricing crude oil are the United States’ WTI (West Texas Intermediate) and United Kingdom’s Brent. The differences between WTI and Brent include not only price but oil type as well, with WTI producing crude oil with a different density and sulfur content. The demand for crude oil is dependent on global economic conditions as well as market speculation. Crude oil prices are commonly measured in USD. Although there have been discussions of replacing the USD with another trade currency for crude oil, no definitive actions have been taken.

Production Response to High Prices

Natural gas futures fell by approximately 7% on Thursday, retreating from a four-month high. This decline was primarily attributed to indications that high prices have incentivized drillers to increase production. Despite the drop, a federal report revealed lower-than-expected gas storage injections. The U.S. Energy Information Administration (EIA) reported a 78 billion cubic feet (bcf) addition to storage for the week ending May 17, below the forecasted 85 bcf and the five-year average of 91 bcf. Nevertheless, storage levels remain 29% above the seasonal norm.

Texas Power Demand and Weather Impact

In Texas, power usage was on track to set a new record for May due to a heatwave, potentially escalating over the Memorial Day weekend. This surge in electricity demand is driven by increased air conditioning use. Concurrently, U.S. government forecasters have predicted an “extraordinary” 2024 Atlantic hurricane season, which could further influence energy demand and supply dynamics.

Negative Spot Market Prices

In the spot market, next-day power prices at the Palo Verde hub in Arizona and the South Path-15 in Southern California remained negative for a second day this week. Negative prices have been a recurring theme in 2024, especially in Texas, Arizona, and California. Palo Verde prices have averaged below zero 16 times this year, while SP-15 prices have hit negative territory 13 times, a stark contrast to previous years.

Supply and Demand Factors

According to financial firm LSEG, natural gas output in the Lower 48 states has averaged 97.4 bcf per day (bcfd) so far in May, down from April’s 98.2 bcfd and significantly below December 2023’s record of 105.5 bcfd. Daily production, however, has increased by about 0.9 bcfd since early May, as higher futures prices encouraged increased drilling. Despite this uptick, overall production is down around 8% in 2024 due to previous cutbacks by major producers like EQT and Chesapeake Energy.

Market Forecast

Looking ahead, the market is showing bearish signs as increased production may outpace demand, particularly with milder weather conditions expected in the northern U.S. However, high temperatures in the southern U.S. and potential disruptions from the hurricane season could add volatility. Gas demand is projected to ease from 92.5 bcfd this week to 91.6 bcfd next week, while LNG export flows have risen, which could offer some support to prices.

Given these factors, the natural gas market is likely to remain under pressure in the short-term.

Natural gas prices moved lower on Wednesday ahead of Thursday inventory report from the Department of Energy. Expectations are for inventories to rise by 104 Bcf according to Estimize. Last week inventories rose less than expected for the first time in a month. Still the trajectory of the inventory rise, and high levels of production along with near tariffs on LNG sent to China should cap prices.

Technical Analysis

Natural gas prices moved lower on Wednesday, falling 2.14% ahead of Thursday’s inventory report. Supoprt is seen near the 10-day moving average at 2.59. Resistance is seen near the 50-day moving average at 2.67. Prices might be forming a bottom. A smaller than expected rise in inventories could give prices the lift needed to pierce resistance. Short-term momentum has turned negative. The fast stochastic has generated a crossover sell signal in overbought territory. The current reading on the fast stochastic is 65, which is on the upper end of the neutral range. Medium term momentum is flat as the MACD (moving average convergence divergence) histogram is printing near the zero index level with a flat trajectory which points to consolidation.

The EIA Reports that LNG Exports Declined

The EIA reported that US LNG exports dipped last week. They quote Bloomgerg in saying that 7-LNG vessels with a combined LNG-carrying capacity of 24.5 Bcf departed the United States from May 2 to May 8. A total of three vessels one at each terminal were loading at Sabine Pass, Corpus Christi, and Cove Points. China announced that beginning June 1, a tariff on LNG imported from the United States would carry a 25% tariff. This is killing the LNG industry, which relies on Asian imports to make their business profitable. LNG imports into the US are small scale, as the worlds largest natural gas producer. The tariffs will reduce Asian demand and cap prices of LNG.

This article was originally posted on FX Empire

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Benchmark Price Performance

Brent crude futures settled at their lowest level since February, while U.S. crude futures hit a three-month low on Thursday. Brent futures are heading for a weekly decline of over 3%, and WTI futures are poised for nearly a 4% drop from last week. The anticipation of ‘higher-for-longer rates’ has put significant pressure on oil prices this week.

Federal Reserve’s Influence

Minutes from the Fed’s latest policy meeting, released on Wednesday, showed policymakers debating whether current interest rates are sufficient to control inflation. Some officials expressed willingness to increase borrowing costs if inflation rises further. However, Fed Chair Jerome Powell and others have indicated that further rate hikes are unlikely. Higher rates could slow economic growth and reduce fuel demand.

U.S. Fuel Demand

Strengthening U.S. gasoline demand ahead of the Memorial Day holiday weekend has helped stabilize prices. The Energy Information Administration (EIA) reported that gasoline demand reached its highest level since November. This seasonal uptick is significant as U.S. drivers represent about a tenth of global oil demand, making the summer driving season a crucial factor for global demand recovery, according to ANZ analysts.

OPEC+ Meeting

Attention is now on OPEC+ and their upcoming meeting to decide on extending voluntary oil output cuts of 2.2 million barrels per day (bpd). The meeting, initially scheduled for June 1 in Vienna, has been moved online to June 2. OPEC+ has implemented cuts totaling 5.86 million bpd since late 2022, equivalent to about 5.7% of daily global demand. Sources suggest an extension of these cuts is likely, despite rising output from the U.S. and other non-member producers.

Market Forecast

Considering the economic backdrop and supply decisions, the market outlook is bearish. While the firm U.S. gasoline demand offers some support, the persistent concerns over interest rates and potential further Fed actions are likely to weigh on prices. Traders should prepare for further declines in the short term, influenced by macroeconomic constraints and OPEC+ decisions.

Technical Analysis

Fed’s Hawkish Stance

The minutes from the May meeting revealed the Fed’s reluctance to cut rates, with policymakers expressing concern about inflation and indicating potential further rate hikes. This hawkish tone drove up Treasury yields and strengthened the dollar, putting pressure on non-yielding assets like gold. The price action this week shows that the metals have reacted noticeably to the Fed’s position.

Impact of Higher Rates on Gold

Higher interest rates increase the opportunity cost of holding gold, which offers no yield. The Fed’s minutes reflected a commitment to maintaining the current benchmark rate of 5.25%-5.50%, with some officials willing to consider additional hikes if inflation pressures persist. Despite the Fed’s confidence that inflation will eventually return to the 2% target, the timeline is now expected to be longer than initially thought.

Market Reactions

Following the release of the Fed minutes, U.S. Treasury yields edged higher, and traders adjusted their expectations for rate cuts this year. The rate-futures market now shows only even odds of more than one rate cut in 2024. Fed officials have tempered expectations for imminent rate cuts, emphasizing the need for more consistent inflation data before changing the current policy stance.

External Factors

While the Fed’s policy is a significant factor, external elements also play a role in gold’s performance. Chinese reserve buying remains strong, though the pace has slowed, providing some support to gold prices. The gold/silver ratio’s recent drop suggests that momentum might shift back in favor of gold, potentially limiting further losses.

Market Forecast

Given the Fed’s hawkish outlook and the potential for further rate hikes, gold prices are likely to remain under pressure in the short term. However, continued demand from major buyers like China could offer some support, keeping losses in check. Traders should brace for a bearish outlook in the near term but monitor demand closely.

Technical Analysis

On May 20, 2024, the Brent crude oil price stood at 83.7 U.S. dollars per barrel, compared to 79.8 U.S. dollars for WTI oil and 84.51 U.S. dollars for the OPEC basket. Europe’s Brent crude oil, the U.S. WTI crude oil, and OPEC’s basket are three of the most important benchmarks used by traders as reference for oil and gasoline prices. The increase noted in April 2024 reflected uncertainty over growing geopolitical tensions in the Middle East. 

Lowest ever oil prices during coronavirus pandemic

In 2020, the coronavirus pandemic resulted in crude oil prices hitting a major slump as oil demand drastically declined following lockdowns and travel restrictions. Initial outlooks and uncertainty surrounding the course of the pandemic brought about a disagreement between two of the largest oil producers, Russia and Saudi Arabia, in early March. Bilateral talks between global oil producers ended in agreement on April 13th, with promises to cut petroleum output and hopes rising that these might help stabilize the oil price in the coming weeks. However, with storage facilities and oil tankers quickly filling up, fears grew over where to store excess oil, leading to benchmark prices seeing record negative prices between April 20 and April 22, 2020.

How crude oil prices are determined

As with most commodities, crude oil prices are impacted by supply and demand, as well as inventories and market sentiment. However, as oil is most often traded in future contracts (whereby a contract is agreed upon, while the product delivery will follow in the next two to three months), market speculation is one of the principal determinants for oil prices. Traders make conclusion on how production output and consumer demand will likely develop over the coming months, leaving room for uncertainty. Spot prices differ from futures in so far as they reflect the current market price of a commodity.

Chance for Bearish Continuation is Increasing

The chance for a continuation of the bear trend is increasing. Recent failed attempts to breakout above the 200-Day MA, the more significant trend indicator, have failed and we’re now seeing increasing signs of weakness. The week ends tomorrow and unless the bulls take back control crude oil is set to end the week with a bearish candlestick pattern.

A bear trend continuation signal will be given on a drop below last week’s low of 76.83. Last month’s low of 76.86 was already busted once earlier this month. A drop below that low will provide a second monthly bearish signal. The next lower target zone includes the 61.8% Fibonacci retracement at 75.49, along with the bottom trend channel line. Further down is the 78.6% retracement at 72.11.

Rallies Will Again Deal with Solid Resistance Zone

On the upside, a rally above today’s high of 79.14 sets up another test of trendlines and moving average as resistance. One thing to consider is that when multiple lines identify a similar price zone, it becomes more significant. For crude oil, that significance may be experienced as strong resistance leading to a bearish continuation, or a key pivot where an upside breakout may trigger strong momentum.

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