Questions are now being raised about the energy sector’s ability to withstand additional recession-focused selling. We still believe – and fear – that worries about demand destruction will be more than offset by supply constraints. Russia’s ability to maintain its current production levels will be increasingly challenged over the coming months. In addition, we are seeing several OPEC+ members close to being maxed out, with only a few oil providers still being able to raise production.
In the short term, we will see a continued battle between macroeconomic-focused traders selling “paper” oil, through futures and other financial products as a hedge against recession, and the physical market where price supportive tightness remains – most notably in Brent where buyers of physical barrels are paying a near record premium for immediate delivery. In addition, the US will eventually have to stop pumping close to a million barrels per day into the market from its strategic reserves. On that basis, we see Brent crude oil trading not far from support. However, in response to the current recession focus, we lower our Q3 target range to $95 to $115.
Industrial metals (Copper)Copper was heading for its steepest weekly decline since early 2020 with the combination of an increasingly challenged Chinese property sector and a global economic slowdown forcing a major adjustment to the short-and-medium-term price outlook for the metal. The Rio Tinto Group, a major supplier and the world’s second largest mining company, warned about the prospects for the global economy in a quarterly update, pointing to war, inflation and tighter monetary policy.
From a technical perspective, the price of High-Grade Copper has, during the past three weeks, cratered non-stop since breaking key support around $3.95. In the process, it has corrected by a massive 61.8% of the $3/lb surge from the 2020 pandemic low to the record high on March 11 this year. Responding to these developments, hedge funds now hold a net short of 26k lots – still well above the 68k lots short held in the aftermath of the pandemic-led slump in early 2020.
A break below $3.14/lb may signal a complete reversal of the uptrend and a return to the pre-pandemic trading range between $2.5 and $3.0. In order to avoid a downward extension of this magnitude, the recessionary pressures and the dollars’ advance both need to slow.