By Barani Krishnan

Investing.com — This week’s Oil-War story concluded with an eerie political cliffhanger that was as dramatic as the crude price movement. Wall Street was as absorbent as any other move on the.

Just as Friday markets were closing, the White House said that Russia was considering a ban on oil from the United States. This is putting the White House back in the same risky situation it tried to avoid since 2003.

We all know why the U.S. – or for that matter, any of its allies – haven’t put an embargo yet on Moscow’s oil and gas exports, despite sanctioning the hell out of almost every financial transaction the Kremlin and its oligarchs have tried to do (which indirectly HAS affected Russian energy sales and spiked costs for us all).

With 10% of the world’s crude and 40% of Europe’s gas coming from the Russians, this is one sanction you want to think about before doing, which is why the White House was quick to say that it wasn’t decided yet on the matter.

As much as Joe Biden’s political enemies would like to claim otherwise, this isn’t about whether he has the will to sanction Russian crude oil. It’s about avoiding further pain for American families at the pump, where a gallon is expected to reach the 2008 pre-financial crisis average of $4 by Monday; not to mention the forward-going impact of that on their grocery bills.

Crude oil prices have risen 25% in the past 24 hours, the same time they were up 25% on Feb. 23rd, the day prior to the invasion of Ukraine. On Thursday, we’ll get the U.S. reading for February, which is forecast to show a year-on-year growth of . January’s year-on-year growth of 7.5% was already the highest since 1982.

UBS believes that an oil price increase of $10 could result in inflation rates between 25 to 40 basis points. Federal Reserve Chair Jerome Powell’s calculation for the same is two-tenths inflation.

“If you have an oil spike and it just comes and goes, it won’t actually affect ongoing inflation,” says Powell, who plans a mere 25 basis points for the Fed’s first pandemic-era rate hike due in mid-March. “But if it’s persistent, then that’s a different thing. And we’re much more concerned at the latter.”

Because analysts believe the only way for oil prices to drop is to increase, Fed Chair might be worried. It’s not just the adage of the commodity world, that the cure for higher prices is higher prices. With Russian oil virtually blocked by existing sanctions, prices will have to rise because (1) there’s not enough supply to feed the 99 million barrels per day of global demand (as per 2019 records) and (2) because the other major producer – Saudi Arabia – will not stop raising its prices.

In a Friday announcement, Saudi Arabia’s state-owned oil company Aramco hiked the official selling price, or OSP, of its Arab light crude to Asia by a record of $4.95 per barrel versus the Oman/Dubai average which it uses as its base.

Russia exported 10.5 Million barrels per hour in 2021, and only 20% went to America.

Eric Nuttall (senior portfolio manager, Ninepoint Partners), discussed Friday’s Twitter discussion and estimated that 1.5 million Russian oil exports had been affected by current sanctions. Another 4.6 million barrels per day could also be in danger if additional restrictions are placed on trade.

“We don’t need official sanctions on Russian energy. They’re being sanctioned unofficially as we speak as there are a lot of uncertainties about … credit lines,” said Nuttall. “We’ve had BP, Exxon, Shell and many others saying ‘We’re out of Russia, we’re not investing any more money (there).’ So there’s gonna be a long-standing structural impact over the medium- to long-term.”

While a lot was being made out of Iran’s tentative nuclear deal with world powers and its return to the oil market without U.S. sanctions, Nuttall said rumors were that the Islamic Republic could only add about 500,000 bpd of new barrels to the trade right away, and another 200,000 bpd over the next six months.

It is due to the fact that Tehran has, according to almost all oil traders and his grandmother, been secretly selling oil to China, India, and other countries over the past year as a result of Trump’s lax enforcement.

“We all pray that peace breaks out (in Ukraine) and the oil price is going to fall back to $90,” said Nuttall. “But I think this is going to be a long-standing crisis instead.”

Nuttall’s typically optimistic view of oil sounds real worried.

“Unfortunately for the global economy, what it means is the oil price now has to go high enough to kill discretionary demand, that it’s too expensive to go on flights and to go on road trips. You’re paying at least $130 for a barrel. This is not the price I want for oil, as it has wider economic implications. However, I don’t see any alternative. Since the beginning, people have discussed the multi-year bullish theory about oil. This was always our conclusion. But the Russian Ukraine war has brought forward the arrival of that conclusion by nine months to a year.”

Nuttall could have been conservative when he forecast. Damien Courvalin of Goldman Sachs, the head of energy research, said that if Russian crude is rejected oil may reach $150 per barrel over the next three-months.

I’m often compelled to take not a grain but a few tablespoons of salt with whatever Goldman predicts because it has a tendency to overstate most things, and then use the big megaphone it wields on Wall Street to saturate the airwaves with its forecasts to try and make them self-fulfilling prophecies.

In this case, however, Goldman isn’t alone. JPMorgan estimates that global crude benchmark Brent will end at $185 in 2022 if there is disruption to Russian oil supplies.

JPM says that in this scenario there might be demand destruction of 3,000,000 barrels per day, referring to the discussion about what price could stop discretionary demand.

A Reuters report published Thursday stated that Americans tend to be cautious about filling their cars with gas when it reaches $4 per gallons. The national average gasoline price was 3.73 per gallon as of Friday according to American Automobile Association. The average national price will rise to $4 on Monday, as I mentioned at the start of this column. This would account for 30% more in the week.

Patrick De Haan of GasBuddy is the head of petroleum analysis. He said in the Reuters article that if you see “4 a gallon”, there might be an adverse reaction. But he also adds that “with a strong economy and prices that remain well below inflation-adjusted records, it doesn’t have the same sting” as in, say 2008.

Mike Tran, RBC senior analyst said that after adjusting for inflation the 2008 $4 per-gallon oil price would equal about $5.20 today. Tran stated in the same story that “the next frontier in oil prices will become defined by prices that seek to destroy demand, and that’s as bullish as a framework gets.”

My understanding is that the consumer reigns supreme. The consumer, not the Saudi Crown Prince, decides what price s/he will pay.

On that end, an interesting nugget fleshed out from Friday’s phenomenal U.S. monthly jobs beat was that there was zero percent gain in average hourly earnings for February despite the addition of 678,000 versus a forecast 400,000. This is remarkable considering wages have risen steadily in the past 10 months due to employers attracting employees.

But there have been declines in U.S. wage pressure previously, only to be followed by sustained periods of increases, and one swallow doesn’t make a summer, as the saying goes. If salaries don’t rise sharply, which they may not as the Fed is preparing to increase rates from here, the consumer could have less money each month. Gasoline at $4, let alone $5, doesn’t seem very affordable at that point.

On the flip side, crude at north of $150 may be exactly what is needed to speed up the alternative energies that are at the heart of Biden’s policies – which his detractors would say got us to this place. “The huge jump in oil and prices will accelerate the switch to electric cars, solar panels and other renewable energy sources,” oil and gas exploration geologist Richard Mason said in a commentaryMy column appeared on Saturday morning, just hours after my columns were published. By refusing to negotiate on prices or production, Saudi Arabia may be in fact helping the United States.

Oil Market Activity & Closing Prices

Crude prices posted double-digit weekly gains and closed at their highest in at least nine years after the White House said it was considering a ban on Russian oil imports, adding to the worries of a market already hyped up about sanctions on one of the world’s largest energy exporters.

The escalating war in Ukraine and the West’s retaliation with more financial punishments on Moscow further fueled Friday’s crude. Another catalyst was Saudi Arabia’s announcement of a record hike in the selling price for its crude.

U.S. crude’s , or WTI, benchmark settled up $8.01, or 7.4%, at $115.03 a barrel, its highest close since 2008.

The U.S. crude oil price was up 26% for the week. This is its largest weekly gain since March 2020.

The global oil benchmark rose $7.65 or 6.9% to $118.03 per barrel. Brent saw its greatest weekly gain in a week at 21%, which is the highest since April 2020.

WTI rose 53% and Brent by 52% since 2005.

Technical Outlook for Oil

WTI’s front-month April contract had a fired-up week with a $22 move ($95.79 to $117.94) that created a massive run away gap on the 4-hour chart, which remains unfilled, says Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“Over time, prices have to come down to fill the gap,” he said.

A one-sided parabolic rally has made the U.S. crude benchmark “extremely overbought”, said Dixit.

“We can still see some more upside to the contract that could take it $120 and $125 over the next week. Nonetheless, with every passing day, oil is inching closer to trigger a sharp decline targeting $105-$95 initially, with the next leg up to the 2008 all-time high of $147 or back down to $82-$67, depending on the geopolitical factors around oil as well.”

According to him, stochastic readings above 94/87 and 97/88 on daily, weekly, and monthly charts respectively indicate an overbought state, with the possibility of advance, with corrective warnings close by.

He said that RSI readings 80, 81, and 73 respectively on the weekly, monthly, and daily charts for the breakout area of $95 warn of a strong pullback over the coming days.

Gold: Market Activity & Prices

The gold price climbed to $2,000 an ounce for the first time in nearly two years as the Ukrainian aggression by Russia deteriorated.

An excellent U.S. jobs report from February, showing no increase in wages and a sterling U.S. employment report also helped gold. Analysts believe the report could encourage the Federal Reserve’s to ease up on the pandemic-era rate increase due within the next two week.

Gold’s most-active contract on New York’s Comex, , settled up $39 at $1,974.90 an ounce.

Benchmark gold futures rose 4.2% during the week. It was on its biggest weekly rise since July 2020. In August 2018, it had reached record levels above $2,100. Gold has declined to $1600 and as high as $1976 since that peak, but it still failed to reach the $2,000 mark.

The Russian invasion of Ukraine, and the soaring US inflation could make gold longer.

“Gold has key technical resistance levels it has to break past, but the argument for the $2000 level does not seem so far fetched anymore,” said Ed Moya, analyst at online trading platform OANDA.

“Demand for safe-havens was elevated after Russians seized Europe’s largest nuclear plant in Southeastern Ukraine. Russia’s military campaign continues to make gains and that is leading to fears they have an ambition to take control of all of Ukraine. With both European equities and the euro in freefall, demand for safe-havens will not be easing anytime soon.”

Gold’s standing as an inflation hedge has also been greatly boosted by the growth in U.S. prices due to ultralow interest rates and trillions of dollars of pandemic-related spending.

To facilitate recovery, the Fed cut interest rates in the United States to almost zero following March 2020’s COVID-19 pandemic.

Following a 3.5% contraction in 2020, caused by disruptions triggered by the pandemic, growth in the economy was 5.7% by 2021. This is the highest rate of expansion since 1982.

But inflation grew even more. The Index is a U.S. inflation indicator that’s closely tracked by the Fed. It rose by 5.8% and 6.1% respectively during the year ended December. These readings indicate the greatest growth in inflation since 1982. The Fed’s own tolerance for inflation is a mere 2% per year.

Bloomberg reported that the inflows of bullion into exchange-traded fund funds may be a support pillar for bullion prices due to economic collapse and war in Europe.

Goldman Sachs estimates that gold-backed ETFs’ holdings could rise by 600 tons this fiscal year, if U.S. economic growth concerns increase. That would potentially lead to a spike in the price to $2,350/ounce. Bloomberg data revealed that funds have received just over 100 tonnes of inflows so far.

Technical Outlook: Gold

Like oil, the price of had a spectacular week, with the previous week’s failed attempt to breach 1974 pushing prices down to $1,879, testing the nerves of longs in the market, Dixit noted.

“The week opened with a massive run away gap as prices debuted at $1,921, which was $32 above the previous close of $1,889, leading to choppy trades. But unlike the technical moves on WTI, gold filled its gap eventually, and resumed bullish momentum,” he said.

Spot gold’s 4-hour chart shows a breakout above the symmetrical triangle formation that targets $2,034 soon after the $2,000 target is cleared, Dixit said.

But while stochastics and RSI are supportive of the upside, any short-term correction below $1,968 will start a sideways minor correction towards the $1,950-$1,935-$1,925, he said.

“Since the main trend is up, buyers are likely to join around the value areas and volume-supported buying can restart the bullish momentum targeting $2,000-$2,034.”

Disclaimer:Barani Krishnan is not a shareholder in any of the securities or commodities he writes about.