While oil and copper prices rallied for a second time last month, those gains have waned. Further meaningful moves could be imminent, with significant consequences for producer stocks, as a number of macroeconomic developments unfold.
West Texas Intermediate crude, the benchmark for prices in the US market, rose 8% from about $67 a barrel in early June to more than $72 in the second half of the month. Copper rose nearly 10% from $3.56 a pound at the end of May to $3.91 at the end of June.
All that lifted
SPDR Fund chooses the energy industry
(ticker: XLE) 7% to around $82 from late May to early June, while the SPDR S&P Metals & Mining ETF (
) rose 15% to about $51 from late May to early July.
The gains came as investors believed the Federal Reserve would soon put an end to a series of aggressive interest rate hikes that began early last year, while China’s economy was recovering from woes. damage caused by the prolonged blockade that Beijing imposed during the pandemic. Both changes mean faster economic growth and more demand for goods.
Now, the market is concerned that conditions may become less favorable. Both commodities have been flat since hitting those minor tops, with oil at around $72, while copper trading at around $3.77.
Buyers are hesitant at least in part because of concerns that the Fed may have to raise rates sooner than expected. Labor demand, while slowing, is still developing, with the possibility of a salary increase. At the same time, the rate hikes already underway are still impacting the economy as tighter monetary policy usually achieves its full effect after a lag. Plus, demand in China hasn’t returned yet.
For oil, “Fundamentals tilt to the bears as the onset of a recession will quickly see the resilience of consumer demand dissipate,” Tom Essaye of Sevens Report write. The same is true for copper.
At this moment, the market is waiting for macroeconomic developments. One point of interest is the success of the Chinese government’s growth efforts. While Beijing has lowered interest rates and the Wall Street Journal reported last month that officials are considering issuing about one trillion yuan, or about $140 billion, in debt to help local governments. indebtedness and strengthen trust among businesses.
Another focus is the Fed. Next week, inflation data for June is released and investors are watching to see if the annual increase in the consumer price index falls below 4%, results for May. Inflation slows This in turn would give the Fed less reason to raise rates, which would support demand and prices of cyclical commodities.
For oil specifically, decisions from the Organization of the Petroleum Exporting Countries are also important. Prices in the futures market reflect concern about demand, although the physical market seems more or less balanced. Producers will benefit when OPEC cuts output to push prices higher.
Clear news on any of these fronts can move commodities and stocks fairly definitively in one direction or another. Price movements can signal where things are headed.
For oil, mid-60s area per barrel is key. If prices hold there, it means buyers are coming, which could mean oil could start an uptrend, helping to boost oil inventories. The key level that copper needs to hold steady is the low of $3.60, which should make the metal and miners’ stocks look attractive.
Copper stocks can grow faster than energy stocks, benefiting holders in companies like
(FCX), because oil stocks have recovered much stronger from lows reached during the pandemic.
Write to Jacob Sonenshine at [email protected]