Investing.com — To hike or not to hike – that’s the question for the Federal Reserve when it meets again in five weeks for its – a dynamic that could see markets bombarded with debates from the central bank’s policy makers, resulting in undue volatility in everything from the dollar to equities and oil to gold.

After the Fed’s May policy meeting which concluded Wednesday, the blackout period for announcements and speeches by the central bank’s Federal Open Market Committee was broken as early as Friday by three members of the FOMC:  James Bullard of the St. Louis Fed, Neel Kashkari of the Minneapolis Fed and Fed Governor Lisa Cook.

Of the three, Bullard, who’s most hawkish on rates, was, unsurprisingly, the most audible too. He played down concerns that more rate hikes would do more damage to the U.S. banking sector – despite the popular opinion on Wall Street that the Fed’s undue tightening almost single-handedly triggered the banking contagion that has swallowed at least three regional banks and was threatening more. Bullard’s point: The ultimate impact of bank stress on the economy will be small.

Bullard also said Wall Street appeared “glued” to the transitory-inflation story and wasn’t prepared for the dynamics of persistent inflation. As such, his simple argument was the Fed had more work to do with rates. After ten hikes that added 500 basis points to rates that previously stood at just 25 bp, Fed policy was still at the “low end” of the restrictive path, and it’s not yet clear if that’s restrictive enough for a downward inflation path, Bullard said.

And while he was ready to keep an “open mind” on whether the Fed should pause in June, his general feeling was that the central bank will have to “grind higher” on rates due to a slower decline in inflation, Bullard said.

What exactly talk of more rate hikes will do to oil and gold in the coming week is debatable.

Crude prices actually rose on Friday, snapping four days of losses in a row for U.S. crude and three for global benchmark Brent,  despite the higher-than-expected non-farm payrolls report for April and its likely advocacy by pro-rate hike policymakers such as Bullard.

The gains weren’t enough though to erase the ferocity of the selloff sparked earlier in the week by the U.S. banking contagion and economic concerns. The effect of that still left crude prices down for a third week in a row.

Some say Friday’s rebound in oil was technical, with crude benchmarks having hit key lows that warranted a pullback. Others tied oil’s better performance to the performance of the labor market itself in April. 

Strong jobs growth is often a plus for oil, whose consumption depends on peoples’ mobility and economic vibrancy. In the case of the U.S. economy, however, strong jobs numbers have also been a problem, as they’ve been adding to inflation since the end of the coronavirus pandemic. 

The employment expansion in April was 73,000 above forecast, moving the jobless rate a notch lower to 3.4% from a previous 3.5% and making it harder – at least in theory – for the Fed to stop raising interest rates.

All said, it has been a dramatic fall from grace for oil in just a month after the much-glorified OPEC+ production maneuver that added almost $15 to a barrel in early April, after another round of selloffs then sent crude prices to 15-month lows.

OPEC+, which groups the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 independent oil producers, including Russia, announced in early April that it will cut a further 1.7 million barrels from its daily output, adding to an earlier pledge from November to take off 2.0 million barrels per day. 

OPEC+, however, has a history of over-promising and under-delivering on production cuts. While the group achieved over-compliance on promised cuts in the aftermath of the 2020 coronavirus breakout, experts say that was more a result of battered demand that led to minimal production, rather than a will to cut barrels as pledged.

Probably sensing that the oil trade may not be as responsive to another production maneuver right away – OPEC+’s next meeting is only in June, anyway –  the cartel’s chief Saudi Arabia announced on Thursday an unilateral price drop of  25 cents a barrel for Asian buyers of its oil.

Moya said the Saudi price reduction to Asia, as modest as it was, “confirms slowdown fears”.  

But the Saudis also raised the selling price of Arab light crude  to North West Europe by $2.10 above the settlement of Brent to leverage on any lost income from the price drop of the past month. That showed the Saudis to be price-focused more than anything else, despite OPEC+’s public protestations that its production cuts were about “balancing” the market.

In gold’s case, the yellow metal tumbled from the record highs seen earlier in the week on signs that the Fed might hike again in June. 

Gold’s decline in the event of higher rates is more easily understood. Rate hikes tend to lift the dollar (though that wasn’t the case this week) and the dollar – and accompanying Treasury yields – are nemesis-in-chief to gold. But like oil, gold also has extenuating circumstances. 

As cited earlier, aside from inflation, markets are also nervous about this week’s resurfacing of the U.S. banking crisis that broke in March.  Adding to that were concerns about a potential U.S. debt default, the first ever, and more weak readings on factory orders and durable goods. As a safe haven, gold is a hedge against those concerns.

Gold “still has a good chance to get back in a record setting mood”, said Ed Moya, analyst at online trading platform OANDA. Moya pointed out that U.S. banking worries weren’t about to go away anytime soon due to how exposed the regional banks were to commercial mortgages.

“Regulators are scrambling and don’t have a clear plan to address the regional-banking crisis,” Moya said, adding that requiring big banks to provide money to refill the deposit insurance fund hole left by failed smaller ones was “just another band-aid solution”.

Oil: Market Settlements and Activity 

New York-traded West Texas Intermediate, or , crude for June delivery showed a final post-settlement price of $71.32 on Friday.

Earlier, June WTI officially closed Friday’s session at $71.34 a barrel, up $2.78,  or 4.1%, on the week. For the week, the U.S. crude benchmark was down around 7%, adding to prior losses of 1.2% and 5.8%, respectively, for the weeks ended April 28 and April 21.

London-traded for July delivery showed a final post-settlement price of $75.37 on Friday.

Earlier, July Brent for July delivery settled at $75.30, rising for a second day in a row by gaining $2.69 or 3.9%. For the week though, the global crude benchmark was down 5.3%, adding to prior weekly losses of 2.6% and 4.9%.

Oil: WTI Technical Outlook

To continue Friday’s rebound, WTI will need to hold above $68 and clearing through the next resistance of $74, followed by the 50-day Exponential Moving Average, or EMA, of $76, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Formations that break below the swing low, followed by a sharp rebound like Friday’s, often surface when markets are looking for liquidity and react strongly when major order blocks are triggered,” said Dixit.

As such, a sustained break above $77, with a weekly closing above the zone, will eventually extend WTI’s rebound towards an initial target of $81. 

Dixit, however, pointed out that WTI’s broader structure on a monthly time frame remained bearish. 

“Bears are likely to reposition their shorts from the $76 zone, with the 100-Month Simple Moving Average, or SMA, of $60 being their major downside target,” he added.

Gold: Market Settlements and Activity 

on New York’s Comex showed a final post-settlement price of $2,024.60 an ounce on Friday.

Earlier, June gold officially settled Friday’s session at $2,024.80 an ounce, down $30.90, or 1.5%, on the day, after a session low at $2,007.10. On Thursday, Comex gold for June hit an all-time high of $2,082.80 an ounce.

The , which reflects physical trades in bullion and is more closely followed than futures by some traders, officially settled at $2,017.56, down $32.64, or 1.6%. Earlier in the session, it broke below the $2,000 support, touching an intraday low of $1,999.66. On Thursday, spot gold hit a record high of $2,080.72.

Gold: Spot Price Technical Outlook 

The spot price of gold needs to reclaim the $2,028-$2,032 zone in order to resume the uptrend, which will target $2,050 and $2,080, said Dixit of SKCharting. “The initial resistance on the upside would be $2,098,” he said. On the flip side though, a sustained break below the 50-day EMA of $1,998 and further below the $1,993 mark will extend spot gold’s downside to $1,977 and $1,968, Dixit added.

Natural gas: Market Settlements and Activity 

It could hardly be described as a positive call for the bullish investors in America’s favorite fuel for indoor temperature control.

Stay neutral on your positions; If you must trade, then short, or sell, into any rally, said Citigroup in a note issued Thursday.

With standing 33% above year-ago levels and 20% higher than the five-year average, it’s not surprising to get such a call from one of Wall Street’s leading forecasters for energy – even if it’s a firm known to be typically more bearish than its peers on oil and gas calls.

Inventory data from the US Energy Information Administration on Thursday showed total gas stored in underground caverns in the United States at 2.063 trillion cubic feet, or tcf, after the latest weekly build of 54 billion cubic feet, or bcf. 

The same week a year ago, storage was at 1.556 tcf. The average between 2018-2022 was, meanwhile, at 1.722 tcf.

Fundamentals for gas aren’t looking great either: The weather is warming slightly, daily production in the fuel is still relatively high and exports of LNG, or liquefied natural gas, are lower than usual, say analysts at Houston-based energy markets service Gelber & Associates. They add: “If a hot summer emerges and power demand competes with storage as is expected, storage being in such a healthy position now will ensure that a scenario like last year’s race to fill storage will not happen this year.”

Given those circumstances, it was probably understandable for Citi to have taken the stand it did in calling on investors to be cautious about building long positions at current prices, which it said would likely be challenged by continuously high production.

“The constructive narrative for prices over the rest of the year, based mainly on stronger YTD (year-to-date) gas demand for electricity generation, could very well be offset by other supply-demand drivers,” the Citi note said.

“In general, we suggest staying neutral or selling into major rallies until the market gets a better sense of summer weather and other fundamental developments. A price bounce during summer could quickly be overwhelmed by robust production, thereby taking prices right back down.”

Output continues to head higher as both natural gas and oil rig counts remain resilient, Citi said. “Looking ahead, production could very well stay more resilient than expected, as many producers are maintaining their gas rig count amid the emerging constructive narrative that dissuades many producers from being more prudent.”

Despite Citi’s narrative that daily output is sticking stubbornly to 100 bcf and above, there could be production slashes by companies responding to the market malaise, said analysts at Mobius Risk Group.

They noted that several natural gas producing companies had reported mulling lower output during their first  quarter earnings calls, after weak gas prices had weighed on bottom line.

However, “the market is clearly impatient when it comes to pricing in the potential for lower output and tighter late-year balances, and instead remains focused on mild near-term weather and a year-over-year inventory surplus,” the Mobius team said.

Natural gas: Technical Outlook

Technical charts suggest that building longs beneath $2 might be opportune for investors in gas, said Dixit of SKCharting.com.

“A break below the $1.94 horizontal support zone will be seen as potential weakness, though there is limited room for downside and the risk versus reward ratio will eventually favor buying the dips,” he said.

“On the flip side, consolidation above the $2.04-$1.94 range will lead to a recovery towards $2.20. But bulls will need to establish a daily close above the 50-day Exponential Moving Average, or EMA, of $2.42 to resume the uptrend. At that point, targets would be the weekly Middle Bollinger Band of $2.78, followed by the 100-day Simple Moving Average, or SMA, of $2.90.”

Dixit, however, acknowledged that the current momentum in gas was bearish with the  5-day EMA of $2.15 making a negative overlap below the daily Middle Bollinger Band of $2.21.

“If the $2.04 support is broken, expect a drop to $1.94, below which the correction can extend to $1.80 and $1.64.”

Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.