Copper managed to claw back some of its steep losses after finding support at $2.50/lb on High Grade and $5800/t on LME. The temporary recovery was supported by robust action from the People’s Bank of China who returned from the Lunar New Year holiday to add liquidity and cut rates. News that China would cut tariffs on American imports also helped sentiment. While these developments are likely to support a recovery in copper once China returns to work, the short-term outlook remains very challenging with half of global copper supply being consumed by China. We keep a close eye on the mentioned levels with a break signaling a potentially even bigger sell-off.
Reports here and here that Chinese demand for crude oil has been cut by more than 3 million barrels/day has kept prices under pressure and once again the market is looking to the OPEC+ group of producers for support through additional production cuts on top of those announce just two months ago. According to a survey from Bloomberg, OPEC’s production dropped to 28.4 million barrels/day in January, the lowest since 2009. Since the peak in late 2016, the group has now cut production by 5.8 million barrels/day with more than half coming from involuntary cuts from Venezuela, Iran and Libya.
Saudi Arabia, who needs oil closer to $80/b than the current $50/b, has shown an interest in yielding further market share in order to support and prevent the price from collapsing any further. The OPEC+ technical committee has proposed an additional cut of 600,000 barrels/day. Russia has once again shown resistance against cutting production and has promised an answer soon as to whether it will join.
Five weeks of selling has taken Brent crude oil down by 25% to a one-year low and the sudden shift from tightening supply to oversupply is reflected in the forward curve. In just three weeks the spread between the prompt April and the September futures contracts has gone from a healthy backwardation of $3/b, signaling tight supply, to a contango (oversupply) of -$0.85/b.