WTI and Brent crude oil both traded lower following several unsuccessful attempts during the past few weeks to break resistance at $41/b and $44/b respectively. Crude oil stocks in the U.S. remain close to record levels with the market now worrying that the virus surge in Texas, California and Florida, the three biggest fuel-consuming states, could slow the recent recovery in demand. Adding to the supply gloom was news that Libya that the civil-war torn country signaled the potential restart of crude exports. This following months of almost zero production compared with 1.1 million barrels/day last December.
The International Energy Agency (IEA) in their latest ‘Oil Market Report’ sounded upbeat given the recent recovery in demand and OPEC+’s successful efforts to curb supply. However, the recent strong growth in Covid-19 cases has cast a shadow over the outlook, thereby putting at risk the market anticipation of a transformation in the oil market from a substantial surplus in 1H to a deficit in 2H. A development that led to the IEA to finish off by a warning that the large, and in some countries accelerating, number of Covid-19 cases is a disturbing reminder that the pandemic is not under control and the risk to their market outlook is almost certainly to the downside.
While this week’s range in Brent crude has been close to the narrowest since last September, these latest developments still support our Q3 view: that Brent is likely to remain stuck within a mid-30's to mid-40's range.
HG copper’s impressive 45% rally from the March low has almost taken it back to the January peak at $2.886/lb. What is particularly impressive about copper’s run higher is that it has reached levels that were last seen just before China officially announced to the world they had a coronavirus problem. Since then, global economic growth has collapsed while unemployment has surged.
Copper has nevertheless managed to rally due to three developments. The pandemic has raised expectations for increased demand from infrastructure projects, especially in China. This is something we are however yet to see confirmed through a pick up in the stock market value of construction companies. Adding to this is strong speculative buying, not only on the exchanges in New York and London but most likely also in China given the mentioned surge in risk appetite. The biggest impact however has been a cut in supplies from Chile, the world’s biggest supplier, after thousands of miners have fallen ill with the virus.
While momentum is strong, we are increasingly skeptical about copper’s ability to rally further. The RSI, at its most overbought level since November 2016, is calling for a pullback to somewhere between $2.75/lb and $2.65/lb. The short-term focus in order to determine the next move will be on the behavior of speculators continued appetite for risk and supply developments in Chile.