WTI crude oil futures surged last week, but have yet to materially break out of their multi-quarter trading range between $40 and $50/barrel. Today, focus will be on the weekly EIA inventory report to see if the data can help propel the energy market back to fresh highs.
Since the unexpected Republican sweep in the US elections, the combination of strong growth expectations and more recently, upbeat Chinese manufacturing data has spurred an impressive rally in copper futures.
Gold futures continue to hold on to critical support in the low $1200’s for now, but if the dollar rally continues, it will likely end the short-lived bull market we pointed out back in April.
Oil futures got caught up in “risk trading” during the election drama. Energy futures sold off hard with global stocks overnight Tuesday and then surged higher as money poured back into risk assets on Wednesday. That was about the extent of the effect that Trump had on the energy markets at least so far.
Tyler Richey, Co-Editor of the Sevens Report, said “Policy wise, it isn’t exactly clear yet how a Trump administration will affect energy markets, however it is fairly safe to assume that he will be pro-US oil and that could tighten or even reverse the arbitrage spread with the global benchmark Brent contract which trades at a premium to our domestic WTI contract.”
Market focus returned to the bearish fundamentals in the back half of the week once the election drama subsided. Most notably, doubts about OPEC reaching any sort of production deal later this month has become a notable headwind. OPEC members have been successful in jawboning the market higher in recent months but traders are beginning to get skeptical as they are saying one thing (“we are going to cut”) and doing another (pumping at or near record highs).
Additionally, the US fundamental backdrop is bearish as production has stabilized above 8M b/d in the lower 48 as rig counts continue to climb while stockpiles are near all-time highs.
Richey, “Bottom line, the trend in oil prices is currently lower and the fundamentals are decidedly bearish for the medium term, leaving the path of least resistance lower as we approach the end of the year.”
Volatility in the gold market has been extreme this week as the initial flight-to-safety reaction to the election results spurred a huge rally but money flows quickly turned risk-on and gold has since collapsed.
Heading into the election there were a lot of investors piling into gold as a hedge and while that position worked overnight on Tuesday, it has since become a losing bet and you are seeing longs get squeezed out as they cut losses.
Looking ahead, this price action in gold is rather discouraging for the bulls however we are not throwing in the towel on our long call just yet as we still see the risk reward of being long gold here as favorable. On the charts, support holding between $1200 and $1220 is now critical for the health of the relatively young uptrend in gold (technicals turned bullish in April).
Silver has a split personality in that it can trade in sympathy with both the industrials like copper or precious varieties like gold. Over the last few days, silver has outperformed gold as futures rallied in sympathy with the historic squeeze in copper futures in the wake of the election. But, the copper surge is showing signs of exhaustion this morning and the new lows in gold are starting to weigh on the dual-purpose silver contracts.
Copper tested and held a multi-month uptrend support line yesterday, but if that level near $2.10 is materially violated it could be forecasting a further slowdown in an already very sluggish global growth rate.
Since we recommended getting long natural gas on September 21st, futures have rallied more than 17% trough-to-peak and we believe there is still more room to run to the upside in both the near and longer terms.
Gold plunged to a 3 month low yesterday amid a hawkish shift in Fed policy expectations this week. Despite the near term breakdown however, the long term trend is still bullish.
Gold futures are currently in a “consolidative pullback” from the post-Brexit highs in June, however the longer-term trend remains a bullish one.
The World Bank thinks global growth will be slower than originally estimated. On Tuesday, the lender issued its semiannual Global Economic Prospects report, and for global growth bulls the outlook wasn’t very encouraging.
For 2015, the global economy is estimated to expand by 3%, which is down from a projected 3.4% growth rate in June. In 2016, the World Bank thinks growth will come in at 3.3%, which is down from the prior estimate for 3.5% growth.
While most investors would be well served to take the World Bank’s estimates with the proverbial grain of salt, one thing we do know is that traders often take these data projections serious—at least in the short-term. We saw just that in Tuesday trade, as growth concerns weighed on commodities, most notably copper, which traded down nearly 5% in the session.
It is often said that copper has a Ph.D. in global economics, which just means that copper prices are a good indicator of the health of an economy. When the economy is trending lower, then usually we’ll see that reflected in copper prices—and that’s precisely what happened Tuesday, and what’s happened in copper via the iPath DJ-UBS Copper SubTR ETN (JJC). This copper exchange-traded note is down some 17.2% over the past three months, a move that betrays just how fearful traders have become about the prospects for global growth.
More broadly, the spot price of copper has been in a bearish downtrend now really since the spring 2011 highs, but most recently lower energy costs and weak demand specifically out of China, the world’s largest consumer of the industrial metal, have pushed prices down to near six-year lows.
The collapse in “Dr. Copper,” has been somewhat lost in the oil declines, but clearly this is not a good sign for global growth.
Chinese demand for copper is expected to fall again this year, and that presents a very troubling backdrop for the future of copper prices going forward. The bottom line is clear; copper is falling victim to a combination of low production costs (oversupply) and soft demand expectations, which is resulting in a sharp slide to the downside that we think has room to continue going even lower.
So, if you are long this industrial commodity (and I hope you’re not) then now is the time to rethink the “Dr. Copper” bull trade.
I briefly mentioned last week the high level trade talks that occurred between China and Canada in Beijing. The net result of those talks, the most material and fruitful in years, was the signing of a declaration of intent to agree to a “Foreign Investment Promotion and Protection Agreement.” (FIPA).
The lengthy name aside, it’s an important step in further Canadian/Chinese trade, as it sets a broad frame work for ensuring equitable treatment for foreign investors in both countries. Basically, it removes a large degree of risk for Chinese or Canadian firms investing with the other country by providing a legal framework and set of laws that protect foreign investors . . .
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