Oil and Copper Rally Fizzles Out

by Warren Seah

The recent rise in oil and copper prices has lost its momentum, causing concern among producers. The outcome of various macroeconomic developments will determine the next significant moves, which could have substantial consequences for stocks.

Shifts in Oil and Copper Prices

West Texas Intermediate crude oil, which serves as the pricing benchmark in the U.S. market, experienced a notable 8% increase. Starting from around $67 a barrel in early June, it reached slightly over $72 by the latter part of the month. Similarly, copper saw a surge of almost 10%, climbing from $3.56 per pound in late May to $3.91 in late June.

Impacts on Stocks

These price increases led to positive gains for certain funds. The Energy Select Sector SPDR Fund (ticker: XLE) rose by 7% to approximately $82 from late May to early June. Likewise, the SPDR S&P Metals & Mining ETF (XME) recorded a 15% gain, reaching around $51 from late May to early July.

Factors Driving the Upswing

Investors were optimistic due to two key factors. Firstly, they anticipated that the Federal Reserve would soon terminate its aggressive series of interest rate hikes, which began in early 2020. Additionally, they saw signs of recovery in the Chinese economy after enduring the challenges brought about by the pandemic-related lockdowns imposed by Beijing. These factors pointed towards faster economic growth and increased demand for commodities.

The Concerns at Hand

However, the market is now apprehensive about the sustainability of these favorable conditions. Both oil and copper prices have stagnated since reaching those brief peaks. Presently, oil hovers around $72 per barrel, while copper trades at approximately $3.77 per pound.

Buyers Hesitate as Concerns over Fed Rate Hikes Remain

Buyers in the market are experiencing hesitations, particularly due to concerns that the Federal Reserve may increase interest rates more than initially anticipated. Although labor demand is still growing, its pace has recently slowed down. However, this slowdown hasn’t dampened hopes of potential wage increases.

Tighter monetary policies take time to fully impact the economy. Hence, the rate hikes already implemented are gradually making their way through various sectors. Moreover, the demand in China has yet to fully recover, adding to the cautious sentiment.

Recession Fears Favor Bears in the Oil and Copper Markets

On the topic of oil, Tom Essaye from Sevens Report suggests that the fundamentals currently favor the bears. Should a recession occur, consumer demand resilience is likely to dissipate rapidly.

Similar concerns can be observed in the copper market. The uncertainties surrounding global economic conditions cast a shadow over its future prospects.

Waiting for Macroeconomic Developments

The market is currently on edge, eagerly anticipating macroeconomic developments that could significantly impact various sectors. One crucial aspect to monitor is China’s efforts to spur economic growth. While Beijing has already taken steps such as reducing interest rates, The Wall Street Journal reported last month that officials are considering the issuance of approximately one trillion yuan (equivalent to around $140 billion) in debt. This strategy aims to assist local governments with their debt burdens and instill confidence among businesses.

It remains to be seen how these measures will influence the overall market trends and investor sentiment moving forward.

The Fed and Inflation Data

Next week, investors will be closely watching the release of inflation data for June. The focus is on whether the annual increase in the consumer price index will be below 4%, which was the result for May. A slowdown in inflation could give the Federal Reserve less reason to raise interest rates. This, in turn, would support demand and the price of cyclical commodities.

Impact of OPEC Decisions on Oil Prices

The decisions made by the Organization of the Petroleum Exporting Countries (OPEC) also play a crucial role in the oil market. While concerns about demand are reflected in futures market prices, the physical market seems to be relatively balanced. If OPEC chooses to reduce production and push prices higher, it would benefit oil producers.

Potential Market Movements

News that definitively affects any of these factors could have a significant impact on commodity prices and related stocks. Therefore, any price movements could serve as important signals for future trends.

Key Levels for Oil and Copper

When it comes to oil, the pricing range around the mid-$60s per barrel becomes crucial. If the price remains stable in this range, it indicates that buyers are engaging, potentially leading to an uptrend and a boost for oil stocks. On the other hand, for copper, it is important for the price to hold steady at around the low $3.60s level. If this level is maintained, it could make both the metal itself and shares of mining companies more attractive.

Potential Outperformance of Copper Stocks

In terms of performance, copper stocks might have an advantage over energy shares. This could benefit investors holding companies like Freeport-McMoRan (FCX) since oil stocks have already experienced a more significant rebound from pandemic-related lows.

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