Commodities Week Ahead: Iran Holds Oil By The Jugular; Gold Awaits Powell

Oil's witching hour may be upon us as the question of whether Iran wins back its stalled nuclear deal from global powers weighs on crude prices. Gold, meanwhile, could drift lower with the dollar likely to gain on speculation that the Federal Reserve would embark on a larger instead of smaller rate hike for September.

US crude prices were back under the key $90 per barrel level while global crude benchmark Brent slid beneath $95 in Monday’s Asian trade on reports suggesting Iran and the European Union were close to reviving a 2015 nuclear deal for Tehran that would lift White House sanctions on the Islamic Republic’s oil.

Israel, dismayed by the increasing possibility that its arch-rival Iran will reap billions of dollars in cash and oil from the deal to pose new terror threats to Jerusalem, meanwhile, pressured the United States not to okay the agreement.

US-based news portal Axios said:

“The White House and the State Department are still reviewing and studying the Iranian response to the EU draft agreement. It is not clear when the US will give its response in private and in public.”

But other media outlets reported as of Friday that all three sides—Iran, the EU, and the US—were all working towards a deal.

According to Al Jazeera, the proposal being considered by the US stipulates that “on the day after the agreement is signed, sanctions on 17 Iranian banks as well as 150 economic institutions will be lifted.”

Instant sanctions removal is something Iran has been demanding since the start of its negotiations with the Biden administration 20 months ago. The White House’s response had previously been that the Islamic Republic roll back the uranium enrichment it had carried out and prove that it wasn’t building a nuclear bomb.

With the US having 'approved' the EU’s so-called final text proposal for the re-establishment of the 2015 nuclear accord between Iran and six world powers, the deal will be carried out in four phases over two 60-day periods, sources with knowledge of the matter told Al Jazeera.

The news outlet said the sanctions release for Iran includes the release of billions of dollars in frozen Iranian funds and oil exports in return for the scaling back of its nuclear program. This is another major development where Iran is concerned.

Some 12 million - 14 million barrels of Iranian crude is estimated to be held as 'bonded storage' in Chinese ports, awaiting the US go-ahead for them to be put to commercial use. About $7 billion worth of Iranian funds, stuck in South Korean banks under the sanctions imposed by Washington, could be freed as well.

More importantly, aside from Al Jazeera, CNN reported that Iran has dropped its demand that the United States stop listing the Iranian Revolutionary Guard Corps as a terrorist organization under the State Department’s watchlist. That demand, like the instant sanctions removal, has been one of Iran’s sticking points that have held up the reinstatement of the 2015 nuclear deal.

A Biden administration official, who spoke to CNN, said:

"The current version of the text, and what they are demanding, drops it. So if we are closer to a deal, that's why.”

West Texas Intermediate, the benchmark for US crude, was down $1.60, or 1.8%, to $88.44 per barrel by 03:00 ET Monday (07:00 GMT). WTI finished last week down 1.43%.

Brent fell $1.69, or 1.7%, to $95.09. Brent’s session low was $94.88. The global crude benchmark finished last week down 1.5%.

WTI could head to as low as $77 if its upside is broken and a full-fledged selloff sets in for the coming weeks, said Sunil Kumar Dixit of SKCharting.com.

“Going into the week ahead, WTI faces challenges from a confluence area of 50-Week Exponential Moving Average of $92.80 and the 5-Week EMA of $93.70,” said Dixit.

“If this zone is breached successfully, we can see a quick test of the 50% Fibonacci level of $96.47. This 50% and 61.8% fibonacci retracement zone often works for short term trend reversal.”

Dixit said strong momentum above $96.47 can bring a scenario where oil makes a short-term rebound towards $104.50.

“Failure to make sustained break above or rejection from $93.70 - $96.47 may expose WTI to a monthly middle Bollinger Band of $80.90 and the 100-Week Simple Moving Average of $77 which measures the 78.6% Fibonacci level.”

Gold prices fell about a half percent on average, extending last week’s 3% tumble, as mixed data raised questions on whether the fledgling US recession will deepen or the dollar will pick up steam again as the Fed weighs more outsized rate hikes.

The benchmark gold futures contract on New York’s COMEX, December, was down $10.10, or 0.6%, to 1,752.80 per ounce. December gold lost almost $53 or 2.9% last week.

The spot price of bullion, more closely followed than futures by some traders, fell $7.36, or 0.4%, to $1,739.70.

Until last week, a four-week run-up had given both gold futures on COMEX as well as the spot price of bullion a gain of about $120 or 7% from July 21 lows of around $1,680. The yellow metal peaked at almost $1,825 on August 10.

But the grind lower has started for gold. The question is how much lower it could get. Surprisingly, both chart signals and views of fundamentals analysts indicate that it will not be very much lower.

This is because of the inflation dynamic that’s tied to the stronger US data that has been emerging over the past week. All said, gold remains as a hedge against inflation for some of the most serious investors, although it has not been able to really live up to that billing since hitting record highs of above $2,100 in August 2020.

SKCharting’s Dixit said gold’s correction could extend to $1,708 if its downside momentum is not arrested. He explained:

“With a sharp and one-sided sell-off for five consecutive days, gold lost $62 this week and its Daily Stochastics at 2/8 had turned extremely oversold calling for a rebound, either from a 50% Fibonacci level of $1744.34 or after the extended drop towards $1729.34.”

“A break below $1,729 will cause a deeper correction and a retest of $1,708.”

For the week, investors will be focusing on a speech by Federal Reserve head Jerome Powell at the central bank’s annual conference in Jackson Hole, Wyoming for insights on the future path of interest rates.

Powell’s speech could shake up markets, with the rally in US equities already showing signs of slowing. US economic data will be in the spotlight as fears over the prospect of a recession linger. Meanwhile, PMI data out of the Eurozone and the UK is expected to point to further slowdowns in business activity. Here’s what you need to know to start your week.

The Fed has hiked interest rates by 225 basis points since March in a bid to battle inflation which is running at the highest in four decades.

Fed policymakers have reiterated that there is still a way to go in their inflation fight, pushing back on expectations of a peak in inflation and a so-called dovish pivot, one narrative that has helped boost stocks.

Last week’s Fed minutes showed that, while the size of the September rate hike is still in play, policymakers felt there was little evidence so far that inflation pressures are subsiding.

Powell is likely to remind investors that with one more inflation report and another employment report still to come before the September meeting officials still have time to decide how large that rate hike should be.

The economic calendar for the coming week features July figures on personal income and spending, which includes the personal consumption expenditures price index, the Fed’s preferred measure of inflation.

In the 12 months through June, the PCE price index advanced 6.8%, the largest increase since January 1982.

Other data points include figures on revised second quarter gross domestic product, which initially showed a contraction of 0.9%.

There will also be reports on durable goods orders, initial jobless claims, and PMI data for July. Meanwhile, data on new home sales will shed more light on the cooling housing market.

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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.

Written By: Barani Krishnan