Copper: lower on hawkish Fed and China growth concerns
Copper prices traded lower for a second week, hitting their lowest level in more than four weeks as strong US economic data and hawkish comments from several central bank heads led by Fed Chair Jerome Powell capped risk appetite. Apart from growth concerns, the various stimulus measures announced by the Chinese government and the People’s Bank of China, have so far left the market unimpressed by their potential. Helping to cushion the fall – which gained some momentum following the slide back below the 200-day moving average currently at $3.8250 in the High Grade futures contract – has been a continued drop in copper stocks monitored by the major futures exchanges in London, New York and Shanghai. A seventh weekly decline has seen the level drop to 242,000 tons, the lowest since last December.
Additional Chinese stimulus or not, we continue to see a clear path towards higher prices in the coming years as the importance of the green transformation theme and its impact on several so-called green metals will continue to provide a strong tailwind, especially for copper, the best electrical-conducting metal for the green transformation - including batteries, electrical traction motors, renewable power generation, energy storage and grid upgrades. Producers will face challenges in the years ahead with lower ore grades, rising production costs and a pre-pandemic lack of investment appetite as the ESG focus reduced the available investment pool provided by banks and funds.
Having dropped back below the 200-day moving average, copper may settle into a period of rangebound trading while we await further news on Chinese stimulus initiatives, and watch the general level of risk appetite. Key support is the May low at $3.545/lb.
Crude oil: a make-or-break quarter awaits
A quarter that delivered two major OPEC production cuts did not prevent crude oil from extending its run of quarterly losses amid an ongoing rate hike cycle leading to growth and demand concerns. Combined with China’s sluggish economic recovery, the price of Brent remains anchored in the 70’s while OPEC, led by Saudi Arabia, would ideally have liked to see it back to the 80’s. For now, prices remain rangebound with Brent trading within a seven-dollar wide range between $71.50 and $78.50, and after seeing another selling attempt though support run out of energy, prices did rise slightly on Thursday in response to stronger than expected US economic data and a weekly inventory report showing a big drop in crude oil stocks while implied demand for gasoline and jet fuel remain robust.
We still see the potential for the coming quarter either making or breaking the crude oil market. This depends on whether OPEC and the IEA’s lofty demand growth forecasts will be met or whether – as the Saudi unilateral production cut from July tried to preempt – we could see economic activity slow to an extent that prices suffer further declines. It would be interesting to see how OPEC handles such a situation, not least Saudi Arabia. Having already cut production, and thereby giving up market share to support the price, the Kingdom is likely to apply intense pressure on other producers to make additional cuts.
At Saxo, however, we believe a US recession will be avoided and that China will step up its efforts to support the economy, but whether this will be enough to support higher prices through a tightening market remains to be seen. For now, we are left with a market where macro-focused funds once again prefer to trade the oil market from a short perspective as a hedge against further economic weakness.
In the short term, we are watching OPEC’s focus on supply management, which for now has kept the market supported above $70, while an upside break seems equally unlikely if the focus remains on a weakening economic outlook. From a technical standpoint, the $80 area in Brent will offer a great deal of resistance and funds positioned for additional weakness are unlikely to change their negative price view until we see the return of an 8-handle.