Also supporting metals in general are reports from Chinese research houses that commodity traders are hoarding tangible assets. Metal companies got cheap Covid-19 loans from banks and they seem to have piled that money into commodities, betting on a price recovery that is more profitable than their production activities. Something that may also partly explain copper’s recent strength and drop in inventories monitored by the Shanghai Futures Exchange.
HG Copper reached an eight-week high at $2.43/lb before running out of steam. While news and improved economic data from China, the world’s largest consumer, remains encouraging the outlook in our opinion remains one of caution. Rising supply from the reopening of virus-hit mining operations raising the question of whether the pickup in demand, especially from Chinese manufacturers, will be enough to avoid a build in surplus stocks this year.
With this in mind we remain skeptical that HG Copper will be able to mount a sustained rally above key resistance at $2.50/lb, an area that provided support for three years before the March break and collapse to $2/lb.
Crude oil continues to push higher and in hindsight the short-lived collapse to a negative WTI price last month probably saved the market and set in motion the recovery currently seen. Major producers around the world, potentially faced with heightened risk of tank tops and the price collapse spreading, stepped up their efforts to cut production. A development which together with a pick-up in demand was highlighted International Energy Agency highlighted in their latest ‘Oil Market Report’ as a key reasons for the recovery seen during the past month.
However, the rally has also resulted in collapsing time spreads which could see oil return from abandoned storage plays over the coming months. Apart from the current front month price developments in Brent crude, the charts below also show the narrowing six months spread between the July-20 and January-21 futures contract.
With this development in mind combined with estimates that demand may not fully recover for at least another year, we suspect that the current recovery may eventually run out of steam. Also considering the risk that U.S. shale oil producers, some desperate to survive, will be able to restart shut-in production as the price reaches economically viable levels above $30/b.
We maintain a longer term bullish view on crude oil but prefer to express this view through investments in well capitalized oil majors instead of products, such as ETF’s that tracks the underlying futures price.