By Barani Krishnan

Investing.com – Is there a demand for oil above $100 per barrel?

It’s a question that’s been asked since oil hit 2008 highs, and it heightened as we got to just above $130 on U.S. crude during the first week of March, while Brent stopped at just under $140.

Then as both benchmarks plunged to below $100 in last week’s trade, the question sounded almost like a self-fulfilling prophecy: Is demand destruction already happening in oil?

It is probable that the answer to this question is “Yes”, but it will not be long before it drops below $100.

No matter what the argument or alternative, anyone who deals in energy will understand that finding sufficient barrels to compensate for Russian exports will prove difficult. 

The Paris-based International Energy Agency, or IEA, which made that estimate, adds: “The implications of a potential loss of Russian oil exports to global markets cannot be understated.”

Yet, oil prices might still fall from demand destruction as gasoline at record highs of above $4 a gallon at U.S pumps discourages drivers in the world’s largest consuming country from filling up their tanks as often as a year ago, when regular automobile fuel was at around $2.50 a gallon.

The IEA is primarily concerned with the interests of Western oil exporters and suggested that consumers and businesses might have to create a shift in their consumption patterns, similar to the Covid lockdown era, to lower crude oil prices.

“Reducing oil demand does not depend only on governments but also citizens and corporations,” Fatih Birol, executive director at the IEA, said. “Measures that they should take would include lowering speed limits, making people work from home, more public transportation and urban car-free days.”

Birol indicated that these measures could reduce the oil demand in a matter of hours by cutting down on oil consumption to 2.7 millions barrels per day.

Mike Muller from Vitol Asia stated that the world has not enough spare capacity and there isn’t enough crude oil. He spoke to an energy market podcast in March. “The law is high prices” will be used to eliminate weaker demand or destroy it.

Global oil demand stands at around 100.6 million barrels daily, with analysts estimating current shortfall at around 3.0 to 5.0 million per day, inclusive of Russia’s shut-in.

Armaan Ashraf, a senior analyst at FGE, adds that the situation was “very foggy” for cracker operations in Asia. It’s a “big risk” to buy naphtha when crude is at $130 a barrel, Ashraf said, adding that profit margins are going to stay poor for at least a month. 

Ehsan Khoman from Mitsubishi UFJ Financial Group was the head of emerging markets research. He shared a similar viewpoint.  Khoman stated that oil prices are so far away from marginal costs of production – due to extreme lack of oil – that they have reached a point where there is demand destruction.  

However, it is impossible to ignore the fact that market prices will not be kept below $100 as long as there are tensions between Russia and Ukraine.

One example is U.S. crude water plumbing, which was at its lowest level of $94 per week. Brent, however, hovered around $96. This was a result of initial optimism regarding peace talks. But, it soared back to over $106 last week. 

“I’m concerned that we don’t have enough oil at all here, and we need to go to $120 to $150 [per barrel], and then we get into economic destruction,” Paul Sankey of Sankey Research told CNBC. 

“There’s a major, physical, immediate outage that caught an already tight market with very low inventories,” he added.

Khoman of Mitsubishi UFJ , who expressed concerns about demand destruction, also said it could not be disputed that the Russia-Ukraine crisis “turbocharges today’s extreme supply shortages.”

Oil: Weekly Close & Technical Outlook

Oil prices closed Friday’s trade higher but still ended down for a second straight week.

U.S. crude’s , or WTI, benchmark settled up $2.01, or 1.9%, at $104.99 a barrel. For the week, WTI was down 4.2%, after the previous week’s decline of 5.5%.

One dollar more than the $107.96 settlement in London-traded oil. This is the benchmark global price for oil. Brent was below $97, down from a March 7 peak of $139.13. Like WTI, it was down 4.2% on the week, following through with the previous week’s drop of 4.6%.

Sunil Kumar Dixit is chief technical strategist of skcharting.com. He said that his analysis on WTI revealed a bearish market. 

“The outlook for the week ahead is broadly bearish with a potential for short-term recovery in prices,” said Dixit.

He noted that WTI’s weekly stochastic at 60/75 was bearish, with a negative crossover and RSI at 67 pointing south.

“A trade below the 5-week Exponential Moving Average of $103 may push WTI down to between $100 and $95. If it gets to $93, that will be an acceleration point to further downside, to the weekly middle Bollinger Band of $85,” said Dixit.

He said that if oil prices were higher than $109.33 it might reach $111.50.

“Breaking and sustaining above $109.33 is essential to reach $111.50 and eventually $116,” he added.

The Market Activity for Gold 

The inflation monster or the Fed ambitious? 

Uncertainty pushed gold lower for the second week in a row, its largest weekly percentage decline since November.

Still, pressure prices combined with concerns about fallout from the Russia-Ukraine war played up gold’s dual economic-political hedge to bring it back above the $1,900 support it briefly broke earlier in the week.

The most-active gold futures contract on New York’s Comex, , settled down $21.65, or 1.1%, at $1,921.55 an ounce. The benchmark gold futures contract suffered 2.8% loss for the week. This is the largest drop since Nov. 19, 2021.

At its March 15-16 meeting in Washington, the Federal Reserve approved an increase of 25 basis points. This is the first time the Federal Reserve has increased rates since the COVID-19 crises began in March 2020. Based on its Federal Open Market Committee (FOMC) policy-making meetings, the central bank cautioned there may be six additional rate increases this year.

Following through with the Wednesday rate decision, Fed Governor Christopher Waller – one of the more hawkish members of the FOMC – said U.S. economic data is “screaming” for bigger half percentage point rate hikes in coming months to stamp out inflation.

Waller’s comments, along with similar hawkish messages from other Fed representatives, helped the dollar rebound Friday, thumbing down commodities denominated in the currency, including gold. The dollar fell more than 1% in the past two sessions combined as currency dealers reacted with disappointment to the Fed’s modest rate hike on Wednesday.

“The dollar is seeing massive inflows and that is short-term troubling for commodities,” said Ed Moya, analyst for Europe at online trading platform OANDA. “The dollar will benefit from a rapidly improving interest rate differential and steady safe-haven flows as investors (become) worrisome over the war in Ukraine’s impact on inflation and ultimately growth.”

Fed Chairman Jerome Powell reiterated after this week’s rate increase that the central bank will be “nimble” as it tries to balance the fastest economic growth in nearly four decades with inflation, also growing at its most frenetic pace in 40 years. The U.S. Gross Domestic Product grew by 5.7% in 2017 after an unexpected 3.5% contraction in 2020. This was the highest growth rate since 1984. Inflation, measured by the Consumer Price Index, or CPI,  expanded by 5.8% in 2021, its most since 1982. 

The Fed has two mandates: Aiming for “maximum” employment among Americans with a jobless rate of 4% or below, and keeping inflation at 2% or below a year. With its first objective, it has been a great success. It brought unemployment to 3.8% in February after a record-breaking 14.8% rate in April 2020.  Its track record on the second target has been terrible. CPI grew by 7.9% in the 12 months to February, faster than the 7.0% recorded in December.

Waller, who is a consistent advocate for tighter monetary policy and more fiscal discipline to manage inflation, stated that the Ukraine war risks led him support for more dovish FOMC colleagues in voting for a moderated rate increase at the March meeting.

However, he indicated that he could push for series of 50 basis point increases at future FOMC meetings in order to “front load”, a stricter policy with greater effect on reducing inflation.

“Going forward that will be an issue – about going 50 – in the next couple of meetings,” Waller said, anticipating resistance from other FOMC members. “But the data is suggesting we move in that direction. Frontloading rate increases is something I strongly support. (Let’s) just do it, rather than just promise it.”

Fed officials expect rates to rise to 1.9% before the end 2022, provided that the FOMC maintains 25-basis rate hikes during its six next meetings.

Waller did not specify where he would like the bank’s rate to be by the end of the year. CNBC reported that Waller seemed to want a level of 2.0-2.255% based on his desire for 25- and 50-basis point increases.

In projections issued at this week’s FOMC meeting, three policymakers projected rates should end the year at 2.375%, while one projected a closing rate of 2.625%. The most aggressive of them, St. Louis Fed president James Bullard  – who also happens to be Waller’s former supervisor – said rates should end the year at 3.125%.

Technical Outlook: Gold

Dixit of skcharting.com said after the previous week’s rejection at $2,070, April gold witnessed a bearish pin bar candle that led to the correction through $1,895 before settling at $1,921.

Weekly stochastic 60/75 showed a negative crossover and RSI 59 was south. This is all that’s needed to continue the downtrend if prices do not break below $1,960-1,985.

“Weakness below $1,920 may push gold down to $1,907, below which bears may gain extra strength causing more dents to the metal and $1,895 can give way, exposing $1,845-$1,820 over the upcoming week,” said Dixit.

Technicals aside, gold’s volatility comes largely from the war in Ukraine, which can continue to cause dramatic and wild swings, he said.

“Consistent buying above $1,920-$1,960 will be closely monitored by traders as any further acceleration on the war front can take gold back up to $2,010 and $2,070 in a short spell.”

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