By Barani Krishnan

Investing.com — This index measures investor sentiment in stocks and bonds. It has a range of 0-100. 0 indicates extreme fear that is causing extreme selling and 100 signifies extreme buying and extreme greed. In commodities though, supply constraints and geopolitics can cause fear and greed to intertwine, meaning fear that something’s scarce can make investors extremely greedy in buying it — like with oil now.

It had all the ingredients for success, including geopolitics as well as supply politics. A real weather emergency was the only thing that wasn’t there. Fears of a Texas freeze, which could lead to a new Permian oil-and gas basin freezing again this year, accounted for the rest.

U.S. crude’s benchmark as well as its U.K. peer rallied for a seventh straight week, racing toward Wall Street banks’ call for $100 a barrel. To be sure, that target was made well before the Russia-Ukraine crisis, half-hearted production hikes by OPEC+ and the arctic blast that gripped much of America earlier this past week, including Texas — typically the fourth hottest U.S. state when it isn’t winter.

This week, the oil rally got a boost as Texas temperatures were originally forecasted to drop to 20 degrees Fahrenheit (-7 Celsius) this week.

West of Texas is home to the Permian oil and gas basin which spills over into New Mexico’s southeast.

“The relative strength of the cold in mid-Texas cannot be understated – consecutive days of freezing temperatures within this week have the potential to lead to additional freeze offs in the Permian,” Dan Myers, analyst at Houston-based energy consultancy Gelber & Associates, said on Wednesday.

But weather forecasts are just that — forecasts. Weather forecasts, which can be so unpredictable as temperature, should not be taken lightly.

Texas was the exception. Forecasts began early this week with Midland. Midland is located in the Permian and has a temperature of 11 F by Sunday. Houston 28F Dallas 18F. 

But as I sat to write this at pre-dawn Sunday, Midland’s low was projected at just 23 Fahrenheit with an intraday high of 53 by late afternoon; Houston was seen at 29-57F and Dallas was forecast at 28-50F.  

The stakes of another super freeze are high in Texas, where last year’s winter storm led to blackouts and deaths of more than 200 people. 

But Texas had begun thawing from the worst of the week’s cold by Thursday, and as crude oil futures opened Friday’s session in Asia, it was clear the Permian wasn’t in such bad trouble, said some traders who spoke to Investing.com on Saturday after closely following the weather there all week.

Utility officials in Texas are also confident the Lone Star State’s power grid will avoid a repeat of last year’s blackouts from storms sweeping through the region. The new regulations that grid operators must increase their reserves and make it more convenient for industrial users who want to lower their consumption have been in effect since the catastrophe of 2021. 

The traders who spoke to Investing.com on Saturday also pointed out that — a commodity used for heating and cooling and as important as oil during the peak of winter and heating — plunged 18% between Thursday and Friday, giving back all of Tuesday’s 16% rally, after it became apparent that the fear factor over the Permian had been overplayed. 

According to traders, gas stocks were actually at higher risk of running out in the immediate term than oil. The five-year average storage was nearly 15% lower than it was a year earlier.

Still, the current buying mania in oil has edged out any rationality, they said, reducing it to a race where both rider and horse — i.e. trader and market — were wearing blinkers in the dash toward $100.

“Crude prices seem to have a one-way ticket to $100 oil,” Ed Moya, analyst at online trading platform OANDA, wrote in his weekend commentary. “Everything seems to be turning very bullish for WTI crude and the bullish momentum might not see much resistance until the $95 level.”

As I said at the outset, with commodities, supply constraints and geopolitics can cause fear and greed to intertwine, and that’s what’s happening with oil now. Last week, the height of the fear-greed focus in oil was on the Russia-Ukraine conflict, which has contributed at least $10 of the premium in a barrel of WTI and Brent over the past month — despite not a missile fired yet by either side in the conflict. 

As if the exuberance in oil buying wasn’t enough, some markets commentators, including CNBC’s “Power Lunch” co-host Kelly Evans, wondered aloud on Twitter this week why pension funds were divesting — instead of going long — on energy and recycling their constituents’ own dollars back into their own future pensions payments.

Maybe their long-term vision on the economy and morals is what influenced their decision (the former has unfortunately become an ugly word in investment).

As I said in my previous week’s column, oil  is the commodity that literally powers and moves the planet. Oil is indispensable to the earth’s mobility. Oil is an underlying commodity of almost all commercial activities. Oil prices rise, which leads to higher oil prices for food, fuel, clothes, and almost every other essential. 

It is funny to hear people claim they buy oil to hedge against inflation. Using gold as an inflation hedge doesn’t contribute to inflation. But it’s a different story with oil.

It’s disingenuous to say you’re hedging against inflation by buying oil when your purchase is actually helping drive up the price of that oil. This is a money-making opportunity for bull markets, which it certainly is. Just don’t use the bull that it’s an inflation hedge.

While we are a pro-investing website, Investing.com sometimes balances its markets’ coverage with commentaries on the social impacts of investors’ actions, especially when those actions could be destructive to the global economy as a whole. And that’s exactly where we are with oil prices threatening to blow well past $100 a barrel, especially when world economic recovery from Covid is still at a fledgling phase. High oil prices have been a catalyst for stagflation and hyperinflation throughout history. 

While we apportion blame to the Biden administration’s short-sighted energy policies (anyone with common sense would have had a renewables plan working vigorously alongside with that of fossils before a transition is made), we must also ask ourselves if FOMO (Fear Of Missing Out) from a rally — or rather RNTMO (Right Not To Miss Out) — is more important than the economy we earn our keep from. 

Keep in mind that some Wall Street banks today were calling for $100 oil, and the Bush administration for mismanaging the economy. Subprime mortgages were the catalyst for that crash, but oil at almost $150 per barrel also played a role.

Oil Prices & Technical Outlook

WTI or West Texas Intermediate traded on New York’s exchange was up $2.04 or 2.3% at $92.31 a barrel after reaching a session record of $93.17. WTI, or West Texas Intermediate, was almost 7% higher week-to date while the cumulative gain of the last seven weeks was 30%. WTI rose 23% this year. 

London-traded Brent oil futures, which is the international benchmark for oil, closed up 2.4% at $93.27. This was after an eight-year high of $93.69. Brent gained 4% week-to-date while the cumulative gain over seven weeks was 27%. Brent gained 20% in the past year. 

Sunil Kumar Dixit, chief technical strategist at skcharting.com, says his view is that the fundamental triggers for WTI have been “overreacted on, well above acceptable elasticity.”

“Short term upside likely to remain capped at $95, whilst breaking below $86 should be the first sign of exhaustion, as the weekly chart is clearly sending overstretched signs and parabolic ascent, after seven weeks in a row of rallying.”

“A bearish reversal top will most likely form if the $86 handle gives further way to the south.” 

Dixit admits WTI may have some upside, pushing towards $95 even with the news about Russia-Ukraine conflict calming. 

“Though the stochastic reading at 94 and RSI at 70 on the weekly chart are at overbought territory, some limited upside to $95 is possible. But on the whole, a technical correction seems more likely than not.”

Gold Price & Market Activity

Two steps forward and one behind — gold’s measured dance on its return to $1,800 pricing continued this week as it survived the onslaught of a powerful U.S. for January, although it could not advance strongly enough to excite longs in the market.

Gold futures’ most active contract on New York’s Comex, , settled up $3.70, or 0.2%, at $1,807.80 an ounce. The week’s gain was 1.3%. 

While a weekly gain north of 1% isn’t bad for any market, in gold’s case it’s a painful reminder to bulls in the market of how underplayed the commodity is as an inflation hedge, when key price indicators in the U.S. are all pointing at 40-year highs.

“The $1,800 level is key for gold and if gold can continue to hover around it, that would be very positive for bullion bulls,” Ed Moya, analyst at online trading platform OANDA, wrote in his weekly commentary.

“If gold breaks below $1,780, conditions could get treacherous and prices could see significant momentum-selling targets towards $1,700.”

Gold longs briefly had a panic moment on Friday morning when gold broke below that $1,800 level, although it never really got far — reaching a session bottom of $1,792.20. Given the circumstances of the jobs report, that was actually pretty impressive on gold’s part.

U.S. employers added 467,000 jobs in January, beating economists’ expectations, although the moved up fractionally to 4% from a previous 3.9%, the Labor Department said in its non-farm payrolls report. Economists tracked by Investing.com had forecast a jobs growth of around 150,000 for last month versus December’s 199,000.

Fed funds futures indicated that there may be five interest rate increases this year following the employment report. This is because of the exceptional labor market conditions which provide a strong base for the Federal Reserve’s efforts to combat inflation.

“The US jobs report has the market now pricing in a greater than 50% chance that the Fed will hike five times in 2022,” economist Greg Michalowski said in a post on the ForexLive financial media platform. “Expectations for March and May hike are now at 100%. There is an 82% chance of a June hike and a 56% chance of a July and November hike.”

There is a 25-basis point quantum per hike. Current rates range from zero to 0.25 percent, with five possible hikes bringing them up to 1.25-1.50%. Some hikes might be higher depending on performance in the economy or inflation.

After staggering unemployment triggered by the Covid-19 outbreak in 2020, the labor market has picked up dynamically, showing a jobless rate of just 4.0% in the January non-farm payrolls report released on Friday — versus a record high of 14.8% in April 2020. An unemployment rate of 4.0% or lower is considered as “maximum employment” by the Fed, which has a dual mandate of growing jobs and keeping inflation under control primarily through interest rate controls.

The Fed provided more than $2 trillion in stimulus over the last 20 months, including a reduction of interest rates to almost zero in March 2020. This has helped to maintain credit markets. Moreover, trillions more were spent by the federal government on pandemic relief, while American workers received higher wages.

This money and supply chain problems resulting from the pandemic have created high inflation. The economy experienced a 5.8% increase last year after a 3.5% contraction in 2020. US Consumer Price Index (a crucial indicator of inflation) grew at its fastest rate since 1982, rising 7% between January and December. The Fed’s own tolerance for inflation is a mere 2% a year.

Technical Outlook for Gold

SK Charting’s Dixit noted that gold managed to keep its head above water this week, post the dreadful $73 drop from the $1,853 high that pushed the metal down to $1,780.

“Gold’s further move into next week will be closely monitored by price reaction to the $1,785 low and the rebound to $1,797, which is a 50% Fibonacci level.”

“Breaking and sustaining below $1,785 will invalidate the recovery and extend the selling to test the lower Fibonacci level of 61.8% at $1,768.”

According to Dixit, the U.S. Jobs Report had raised expectations that gold would reach $1,800 and $1,797, respectively.

“Gold, in fact, surprised by rebounding to above $1,800. The rebound may extend to $.1825 if it holds above $1,785 during volatility this week. This level is crucial for any further upside.

Disclaimer: Barani Krishnan doesn’t hold any positions in securities and commodities that he discusses.