Commodities Week Ahead: Ukraine Crisis Pushes Oil Toward $100; Gold To $1,900

They had waited seven years but Legal foreign exchange trading platformoil bulls may now need to wait not even seven days to return to $100 pricing. 

As the Ukraine crisis remained on the boil at the start of another week, crude prices were about $5 a barrel or less from reaching triple-digit pricing, the first time they would see such a milestone since July 2014.

Gold was also exhibiting signs of a breakout, with the Russia-Ukraine conflict providing the geopolitical tailwind for the yellow metal to progress from mid-$1,800 levels to the long-awaited $1,900 berth.

Gold Daily

Last week, crude oil’s global benchmark Brent rose for the eighth week in a row while bullion clinched a third weekly win. This week, bulls in both commodities will likely be victorious again on US warnings that Russia could invade Ukraine at any time and even create a surprise pretext for the attack.

"If... troop movement happens, Brent crude won't have any trouble rallying above the $100 level. Oil prices will remain extremely volatile and sensitive to incremental updates regarding the Ukraine situation," OANDA analyst Edward Moya said in a note.

Oil Overbought But That Won’t Stop Its Rally

After roughly two straight months of gains, both Brent and US crude’s West Texas Intermediate benchmarks were overbought, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“In WTI’s case, this week’s rise from the lows of $88.40 to the highs of $94.65 has left it with a weekly stochastic reading of 94/94 and weekly RSI reading of 71,” said Dixit. Adding:

“These are the prime overbought conditions that shout out aloud for an imminent correction to at least $88 and $77 over short to mid term. But will we get that? Probably not, as long as the Ukraine crisis keeps bubbling.” 

Dixit added that consolidation above $90 and $92 could strengthen WTI to position for $98 and eventually cross the much-anticipated $100 mark, with $101 and $107 targets.

Gold Could Scale $1,916 If Breakout Continues

In gold’s case, he said, with its rise from $1,808 support and breakthrough of $1,865, it had broken multiple resistance levels.

“Prices may witness a continued charge to $1,900-$1,916, if gold can sustain above the $1,843-$1,825 support zone in the event of any correction,” said Dixit.

Markets remained on the edge over Ukraine, after a phone call between US President Joseph Biden and Russian leader Vladimir Putin failed to douse the potential flames of war, with Washington reaffirming its pledge to defend "every inch" of NATO territory if fighting indeed broke out.

But there’s also potential for any risk rally to be capped by tough talk likely to come from a host of Federal Reserve bankers who’ll be speaking this week about impending action by the central bank in fighting inflation. 

St. Louis Fed’s Bullard and Loretta Mester will speak on Thursday before Friday’s full day spread of Fed Governor Lael Brainard, New York Fed President John Williams, Fed Governor Christopher Waller and Chicago Fed President Charles Evans.

Last Thursday, Bullard said in the light of the latest CPI reading he now wants a full percentage point of interest rate hikes over the next three Fed meetings. That’s the kind of super hawkish Fed talk that even the most bullish investors in oil fear. After Bullard’s comments last week about the potential need for a 100 basis point rate hike by July, crude prices fell 2% on the day.

And there’s more from the Fed this week, other than its speakers. The central bank’s minutes from its January meeting will be released  on Wednesday.

Powerful Fed Week of Speakers And Meeting Minutes

With markets already pricing in a strong chance that the Fed will hike rates by half a percentage point at its upcoming March meeting, Wednesday’s minutes from the Fed's January meeting, will be scrutinized for any indications on how big a move officials are contemplating.

Last month, Fed Chair Jerome Powell flagged a March lift-off and said there was “quite a bit of room” to raise interest rates without threatening the recovery in the labor market.

On Friday, Goldman Sachs said it now expects seven quarter percentage point rate hikes this year, up from its previous forecast of five, as it updated its forecast following Thursday's US CPI data.

Markets will get an additional update on the inflation picture with Tuesday’s release of producer price inflation figures, which are expected to remain elevated.

Soaring inflation has seen consumer sentiment deteriorate, so Wednesday’s data on retail sales will also be in focus this week. Retail sales are expected to have risen 1.8% last month, boosted by higher auto sales.

The economic calendar also features reports on industrial production, initial jobless claims, existing home sales, building permits and housing starts.

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 a position in the commodities and securities he writes about.

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