Copper and oil continue to bleed

Published at Nov 24, 2015, in Features

There is a lot to speculate on in world markets. What the Fed will do is front of mind as is the price of oil and copper.

It is copper and oil that is of most concern.

James Stanley, Currency Analyst at DailyFX says, “Volatility has a tendency to increase near the top or bottom of major market moves, and the continued drive being seen in Copper and Oil prices are indicative of such an environment. The meltdown being seen in these markets (along with many other commodities) doesn’t yet appear close to being over, and with even further evidence of continuation in these trends, we’re now beginning to see investment banks jump out with forecasts and long-term price targets in these markets.”

Goldman Sachs recently forecast $20/barrel for oil, with one analyst saying that there was a 15% chance that Oil hits $20/barrel in 2016.

“The big factor here would be OPEC, and whether or not they’d cut production to temper the declines being seen in Oil prices,” Stanley says.

Venezuelan Oil Minister Eulogio del Pino said that OPEC could not allow a price-war to continue developing in Crude Oil. The minister made it clear that action must soon be taken to stabilise prices. He warned that should OPEC fail to take action prices could fall to the mid -20s.

There are ramifications to this, most notably the need to cut production to counter falling prices.

“You have to go into all of these countries that are already arrested by economic development and say ‘you need to stop drilling so much of that commodity that makes you money’,” Stanley says.

“Take Mr. del Pino’s own Venezuela, that is currently in the midst of hyperinflation. The inflation there is so rampant that the country has stopped reporting the number: The last read that we had was in December of last year when inflation came in at a rampant 69%. And just because they’ve stopped reporting it doesn’t mean that it’s stopped: Just in August, the Venezuelan government added another zero to their currency in an effort of ‘re-flating’ their monetary system. For anyone with any type of history in economics, you’ll probably know that by the time an economy gets to the point of throwing extra zeros on their currency just to tell their own citizens that it’s worth more (when their spending and investment decisions suggest otherwise), it’s probably too late already (ala Zimbabwe).”

Stanley has proffered a fairly severe example here, but it does indicate what happens to an economy when it is tied to just one commodity. When change occurs a butterfly effect develops with long term ramifications.

“Economies, like investors, need diversification; and without it, they’re simply exposed to pricing pressures and major market trends in commodities,” Stanley says.

Continued weakness in Oil prices will likely spell continued pain for the global economy, especially Emerging Markets that have a heavy dependence on energy exports.

And what about copper?

Stanley says what we are seeing in copper right now isn’t healthy.

Last week was the sixth consecutive week of losses for Copper, and we’ve just sank to a new 5-year low. As we discussed last week, Copper has huge industrial usages as infrastructure is built out, as it’s a key component of electrical wiring. So as growth increases, so does the need for copper so that electricity can be wired for new buildings; but as growth slows, like what is happening in China right now, the need for copper decreases and the price, in-turn, moves lower to reflect that.”

Stanley says this has been happening for the past four years, with prices cut in half since 2011.

Just last week, President Xi warned that the Chinese economy was facing downward pressure, and this only hastened the decline in Copper prices.

“Moving forward, given that we’ve already seen a massive move, long-term price targets can be difficult as analysts would essentially need to guess an answer in the game ‘how low can Copper go?’

“We’ll likely see some near-term support develop in the $2.0000 range, but after that, longer-term price targets essentially become guesswork given that we haven’t been in this price vicinity in such a long time.”

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