Monthly Review: May 2022 - Oil and Gas Higher on Russian Sanctions.

Overview

Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout June and beyond.

As we finish the month, and into the first day of June, it all seemed to have happened during the last few days of the month.  We talked about the European Union getting more serious about stopping the import of Russian Oil and Gas.  Well, it finally happened on the last day of May.

Last month we talked about the Central Banks raising interest rates and the possibility of recessions.  This is still a threat, combined with inflation caused by the Ukraine war but, like many economic and geopolitical issues, the markets get used to it and investors march on.

Global stock indices had been in a 2-month downtrend, until late in May, when those investors buying the dip finally pushed price action through the upper trend lines.  This occurred on the last day of the month as China announced better news on the fight against COVID, thereby reducing the number of lockdowns and production problems.

Crude Oil

 We had said that OPEC+ might be increasing production in June and on the first day of June they announced something dramatic.  Basically, Russia has missed its production quotas (for obvious reasons) and their production would be cut from further OPEC deals.  Therefore, other OPEC+ members will be increasing production to compensate for the exclusion of Russian production and the banning of Russian oil imports by Europe.

Brent Crude Spot fell to support at just over $100 per barrel on 11 May then crept up all month based on the threat of European sanctions on Russia.  On the last day of the month, two things happened driving price to the monthly high of over $120 per barrel:  China announced that COVID was coming under control and therefore factory production would increase thereby driving demand for energy, and the EU finally started to ban Russian Oil importations.

Many analysts feel that we have seen the peaks of price action on Brent Crude and WTI but, in reality, this will depend on OPEC+, Vladimir Putin, and COVID (yes, we still need to consider COVID).

Natural Gas

You will note the similarities between the Crude Oil chart above and the Natural Gas chart below.  Price action has been driven by the same factors during May.

However, the difference in percentage change of these energy commodities is vast; Oil fluctuated from $100 to $120 per barrel during May, thereby giving us a 20% variance.  Natural Gas fluctuated from a $6.40 low to a May high of $9.30, creating a variance of 45% from the lows.

As we mentioned last month, Natural Gas is required for almost everything from fertilizer production to home barbecues and these price fluctuations are seriously driving inflation.  This, of course, is a headache for struggling families and central banks.

The next big move in the world of Natural Gas may come from an EU ban on Russian Gas but this may not be coming soon.  Gas is much harder to deliver than oil and it is not a simple process for an economy to change suppliers so demand on Russian Gas remains high.  Any threat to this relationship will see Natural Gas prices moving even higher and inflation being affected, again.

US Equities 

The chart of the S&P 500 shows the direct fall throughout May with a recovery near the end of the month.

The downtrend was a hangover from a variety of issues including:

• - higher interest rates which affect the cost of doing business
• - geopolitical uncertainty due to the Ukraine war
• - supply and demand issues caused by the Chinese COVID lockdowns
• - consumer demand uncertainty caused by high inflation
• - higher cost of doing business due to high energy prices and inflation in general.

As the markets often do, they get used to adversity, and dip buyers have bolstered the markets worldwide.  The last day of May saw good news from China regarding COVID lockdowns which helped global investor confidence.

Inflation is affecting economic growth and Goldman Sachs (1 June) just issued price-target warnings against many tech companies, expecting a slower economy.

Asian Equities

Like most global stock indices, the Japanese Nikkei spent the first part of May in a downtrend.  Contrary to most global stock indices, the index rebounded before the middle of the month.  This was likely due to the fact that the Japanese yen was at an extreme low point which enabled most Japanese companies to capitalize on exports.

As the COVID situation improves in China, we see further growth in the Nikkei as supply lines and markets will open up for them.

The good news, on the last day of the month regarding COVID lockdowns in China, caused price action on the China A50 to break the upper trend line in a long bear run.  The picture during the month of May was optimistic overall as we see an uptrend in progress.

Uncertainty will follow all Asian companies as long as energy costs remain high and China/US trade relations remain strained.  These issues show no immediate signs of being resolved and they will probably drag on into 2023.  Having said that, we still see reasonable upside throughout 2022.

USD

Last month we looked at serious USD strength due to the rising interest rates but, during the month of May, it gave lots back to the market.

The concept of a strong economy is losing its shine as inflation is impacting every walk of life in the US (and globally, of course).  The Fed, traders, and investors will be watching the Non-Farm Payrolls, Friday 3 June, for clues as to how the economy is faring post-pandemic.  Then, on 10 June, US CPI is due which will let the Fed know about the status of inflation, and then, on 15 June, they will let us know about the next rise in interest rates…0.25% or 0.5%?

JPY

Last month we looked at the weakening JPY and forecasted a 130 USDJPY.  We got there but the Japanese yen gave us a bit of strength during the first part of the month. 

However, we are again seeing JPY weakness and most traders are looking for clues as to when they can trade the reversal.  This may not happen until 17 June when the Bank of Japan releases its Monetary Policy Statement.

CAD

We can clearly see from the charts that the last half of May was positive for the Loonie as it almost always follows the price of WTI.  Also, today (1 June) the Bank of Canada increased its Overnight Rate to 1.5% from 1% strengthening CAD even further against most pairs.

GBPCAD, for example, is heading for support from six years ago so this pair will be one to watch for a potential reversal.  Stability in the UK economy and government and any hint of the fall in the price of Crude Oil will see a change of fortune for GBPCAD.

That’s all for now.  Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of June.