The Chilling Effects on Commodity Rally. What’s Ahead?

Last month saw a robust rally in oil and copper prices. That cheers investors who have bet on the global economy’s resilience, especially with China coming out of its Covid- lockdown and the string of stimulus to boost domestic demand.

The large gain had unfortunately cooled down recently. Nonetheless, we could expect significant moves ahead, which could have implications for producers’ equity prices as major macroeconomic factors develop.

Crude Oil and Copper

These two commodities would shed light on investors’ outlook for the economy. After all, these prices are often cyclical as they tend to rise in episodes of rosy economic outlook and fizzle when the economic demand dims. So our first goal was to read articles about such price movement. Bingo and we found one that helped to deliver a narrative on the run-up span of these prices.

The West Texas Intermediate crude oil had rosed from around $67 a barrel in early June to around $72 near the end of June. A similar remarkable rise is seen in Copper, which stood at around $3.56 per pound in late May to hit a high of $3.91 towards the end of June.

The ETF ticker, XLE, Energy Select Sector SPDR Fund, jumped by around 7% to reach $82 within the span of late May to early June. The same dramatic upward trend is seen in the ticker XME, SPDR S&P Metals & Mining ETF, which climbed around 15% to $51 between late May and early July.

Basis of a robust commodity rally

There are strong stimulants towards the rally of these commodity prices. First, investors expected the Federal Reserve to reach its final rate increase since it rolled out last year. Simultaneously, there was a strong conviction that China is jump-starting its economy, and it recovers from the deep damage caused by frequent and prolonged lockdowns during the pandemic.

These factors would promote higher economic activity and, thus, fertile bedrock support for commodities.

The global economic outlook has turned milky.

The factors attributed to the euphoric rise in commodity rallies are being tested. The Federal Reserve’s latest minutes had outlined a projection of more interest rate hikes ahead. The effect of such interest rate movement tends to support the dollar’s strength, adding pressure to commodity prices. Furthermore, higher interest rates tend to slow down economic activities, translating a deep drag on commodity demand.

Not to ignore the fact that the monetary tightening policy tends to have a lag time on its effect on the real economy, which is now working its way towards a full impact. As such, we could expect further headwind pressure on economic activity.

Then came the weaker economic drive of China’s economy that further added to the woes on the outlook for commodity prices. Despite the successive targeted stimulus package by the Chinese government in the form of lower interest rates, the producers’ profit, manufacturing production, and services sectors’ performance were sluggish.

Recently, there was a report that the Chinese government may consider rolling out around $140 billion of debt, equivalent to about one trillion yuan, as The Wall Street Journal reported last month. The goal is to help many indebted local governments and promote business confidence among the investment community and the general public.

Next Week CPI data will be a key catalyst.

We will soon arrive at the next pivotal stage. The inflation CPI data for June will hit the news, and investors are keenly targeting if the CPI index on an annual basis can drop to below 4%. The slowing inflation will give Fed more space to hold on to rate increases, which could support a cyclical upswing in the economy.

Oil prices are fairly stable, with OPEC as a major determinant

Indeed, any decisions by the OPEC will be key in shaping oil prices. After all, the future market prices mirror the expectation of demand. We have seen the physical market showing a somewhat balanced outlook.

Producers would be the biggest beneficiary if OPEC curtailed output again through production cuts.

Major Prices Levels for Oil and Copper

Investors hope oil prices can maintain above around $65 per barrel. If the price does hold at this level, it is an indicator that buyers are still rotating into the commodity and signals a potential uptrend, boosting oil stocks/

For Copper, we should observe if it is able to stabilise above the low end of $3.60, and forming that as a base will give rewarding prospects to the commodity and its related miners.

Still, investors may be more biased toward the rise in copper stocks than energy shares, given that oil prices jumped more from the pandemic lows.

As more news hits the wires, it’s again the wave for commodity.