A 2020 déjà vu China's pandemic crisis dragged on oil sentiment this week, despite the fact that the EU-Russia standoff over Ukraine signals petroleum prices have little room to rise.
Brent crude and West Texas Intermediate, or WTI, crude in the United States finished lower on Friday, posting their third weekly loss in four, as investors reacted to the Covid crackdown in Shanghai, as well as the threat of weaker global growth and higher interest rates.
China's GDP grew 4.8 percent year on year in January-March, according to official government data released this week.
However, the IMF and banks including UBS, Bank of America, and Barclays cut their growth predictions for China in 2022 this week.
Nomura's projection was particularly dismal, calling for growth of just 3.9 percent, the lowest pace since 1990 - except for 2020, when the pandemic crippled the global economy.
Despite the optimistic first-quarter figures, economists warned that storm clouds were brewing as retail sales, a crucial sign of economic health, dipped 3.5 percent in March compared to the same month last year.
The bleak prognosis kept the world's second largest economy in check, while spurious Covid-19 fatality numbers drew attention to Beijing's penchant for secrecy and narrative control at all costs.
What concerns observers the most is President Xi Jinping's determination to compel China to adopt a zero-tolerance policy against the virus long after the rest of the globe has recovered from the pandemic.
In the majority of nations, including the United States, standards dictate that any fatality caused by Covid-19 is considered a Covid-related mortality.
However, Zhang Zuo-Feng, an epidemiologist at the University of California, Los Angeles, noted that in China, health authorities include only those who died directly from Covid-19, eliminating those whose pre-existing diseases were exacerbated by the virus.
"If they can attribute the deaths to an underlying ailment, they will always report it as such and will not classify it as a Covid-related fatality; this has been their practice for many years," said Jin Dong-yan, a virologist at the University of Hong Kong's medical school.
Due to the more restrictive criteria, China's Covid-19 mortality toll will always be much lower than that of a large number of other nations.
Meanwhile, Bloomberg adds that as a result of the Shanghai shutdown, China's demand for gasoline, diesel, and aviation fuel is likely to fall 20% year over year in April.
This would equate to a 1.2 million barrels per day reduction in crude oil consumption, they claimed, and would be the biggest cut to demand in more than two years since the lockdown in Wuhan — the central Chinese city where Covid-19 was first detected in 2020.
"Yet China is considering reopening, and the decline in demand does not appear to have helped cushion the world oil supply," said Phil Flynn, an energy analyst with Chicago's Price Futures Group.
Weekly Settlements & Technical Outlook for WTI
London-traded Brent crude oil prices finished down $2.13, or 1.97 percent, at $106.20 per barrel on Friday. Brent fell 4.5 percent for the week, following a near-9% increase last week and a 13% decline in the previous two weeks. If the falls continue, April will be Brent's first negative month of the year.
WTI futures on the New York Mercantile Exchange ended Friday's session down $2.04, or 1.97 percent, at $101.75. As with Brent, WTI fell 4.5 percent for the week and exhibited similar volatility to the UK benchmark in the preceding three weeks.
Weakness below $102 may force WTI to challenge the 50-Day Exponential Moving Average of $100.40, at which point sellers may attempt to target the Fibonacci level of $99, according to Sunil Kumar Dixit, chief technical strategist at skcharting.com.
"As we approach the coming week, volatility is likely to keep oil trading sideways with a bearish bias," Dixit said. "Significant support and downside targets are located at $92.93 and $92, respectively."
"The weekly stochastic reading of 41/46 and the Relative Strength Indicator reading of 58 signal that the trend is fading and that lower prices are definitely likely," he added.
On the upside, a sustained move above the 50-day exponential moving average of $100.40 suggests buying with targets of $103.80 and $105.40, Dixit said.
Weekly Gold Market Activity
On Friday, gold, silver, platinum, and palladium joined oil and other energy commodities in a sea of red that engulfed Wall Street indexes ranging from the Dow to the S&P 500 and the Nasdaq.
"Every time you see this tremendous sell-off in equities in response to rate hike talks, you're going to see some follow-through selling in precious metals," Phillip Streible, metals strategist at Blue Line Futures in Chicago, said. "In a sense, the baby is thrown out with the bathwater."
June gold futures on the New York Comex settled down $15.70, or 0.8 percent, to $1,932.50 an ounce on Friday. It declined 2% for the week, an unexpected decline following Monday's surge to a six-week high of $2,003.
Gold fell on Friday as the Dollar Index reached a more than two-year high of 101.34, while the benchmark 10-year Treasury yield approached December 2018 highs.
"High inflation and an uncertain economic climate have been extremely supportive of gold and I do not see that to change, but the more tightening markets price in, the more resistance we will see gold rallies," said Craig Erlam, analyst at online trading platform OANDA.
"Of course, things might change if recession signals begin to flare, but there is still some hope that this can be averted," Erlam said. "The 5/30-year bonds have reversed again, which may create some concern, but the 2/10 spread remains good for the time being."
Friday's market liquidation was triggered by a string of Fed officials - notably James Bullard and Mary Daly, who lead the central bank's St. Louis and San Francisco divisions, respectively - and was reiterated by Chairman Jerome Powell himself toward the end of the week.
All were calling for a 50 basis point, or half percentage point, increase at the Fed's upcoming policy meeting on May 4-5, following a 25 basis point, or quarter point, increase in March. Bullard was even speculating on a 75 basis point, or three-quarter point, raise at some time, arguing that the Fed was significantly behind the curve in combating inflation, which showed little indication of abating from 40-year highs.
"Some fear that a 50 basis point rate hike will be the first of many, slowing the economy and oil demand," Phil Flynn stated.
"It is not just the tightening cycle that has surprised traders overnight, but also the pricing in of a 50-basis-point interest rate hike by the European Central Bank in September," Flynn noted. "On the other hand, the Bank of Japan wishes to remain dovish but is concerned that the United States and Europe's current track may compel them to pivot."
Fawad Razaqzada, an analyst at ThinkMarkets, echoed Flynn's sentiments.
"In the next weeks, we won't hear much from Fed speakers as we approach the blackout period ahead of the central bank's May 4 meeting. However, the damage has been done and the message has been sent loud and clear: the US Federal Funds Rate will very certainly increase by 50 basis points at that meeting," Razaqzada stated.
Technical Outlook for Gold
According to Dixit of skcharting.com, a sustained decline below $1,930 might bring gold into the 61.8 percent Fibonacci level of $1,900 and ultimately $1,888.
"Weekly stochastic and RSI readings of 51/58 and 56, respectively, are indicating further downside," he said, referring to gold's current price.
On the other hand, if prices manage to persist above the 50% Fibonacci level of $1,930, the 38.2 percent Fibonacci level of $1,960 would be the first upside objective, Dixit said.
"If gold attracts sufficient purchasing over $1,960, it has the potential to retest the Fibonacci 23.6 percent mark above $2,001," he added.
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