Stabilising markets allow crude traders to focus on supportive fundamentals
Crude oil began August on the defensive, with prices suffering additional losses on top of those seen last month. The market was dominated by concerns over Chinese demand and increased focus on whether the US economy can avoid a recession. The recent loss of risk appetite across key stock market sectors culminated in a major deleveraging move out of short yen positions, sending shockwaves across global markets, including commodities.
Supply risks remain a concern, particularly with the halt in production from Libya’s biggest field, geopolitical tensions surrounding Ukraine’s cross-border attack on Russia, and Iran’s promise to retaliate against Israel for a recent assassination in Tehran. Despite these threats, the market has so far seen a limited reaction, with reports suggesting that Iran wants to avoid a region-wide war that could disrupt oil and gas flows from the Middle East.
OPEC+ is increasingly likely to defer the planned October production increase given the current fragility and negative sentiment from outside developments. Additionally, with the North Atlantic hurricane season underway, the risk of disruptions to crude production or refining presents an underlying source of support for prices.
Brent crude hit the bottom of a long-held range between USD 75 and USD 90 per barrel this week. However, stabilizing markets, geopolitical tensions, a continued drop in US crude stocks, and a technically oversold market condition helped support a small and ongoing recovery. Considering current and potential future developments, the market may hold current support levels, but the upside potential appears limited to the mid-80s.
Copper’s stockpile issues
Since reaching a record high of USD 5.2 per pound in late May, High Grade copper has slumped 20%, with most of the decline occurring over the past month as China’s demand outlook deteriorated and US data increasingly pointed to a slowdown. The second quarter in China typically sees industrial activity pick up after winter and the Lunar New Year holiday, but this year has been different. Inventories monitored by major futures exchanges have continued to rise rapidly, signaling a major supply-demand mismatch due to weak demand.
Total stocks at warehouses monitored by the London and Shanghai exchanges have risen to levels not seen since the pandemic’s early days in 2020. After an initial rise in Shanghai, where the overhang was most pronounced, material began flowing into LME warehouses in South Korea and Taiwan. This culminated this week when the LME reported the biggest one-day inflow since 2019, bringing total LME-monitored stocks near 300k tons, further unnerving remaining bulls. Monday’s deleveraging-led mini-crash and volatility spike only added to the negative sentiment, which at best suggests a period of consolidation until fundamentals improve.
Five consecutive weeks of selling have returned HG copper to around USD 4 per pound. Technically, support is seen near USD 3.85 per pound, aligning with the trendline from the 2020 low and the consolidation area that existed for several months before the move higher earlier this year. The first sign of stabilization would likely require a move back above the 200-day moving average, currently at USD 4.11, followed by the recent high at USD 4.2235. It is also worth noting that speculators since May when their net long reached a 40-month have cut their exposure by 87%, with none of the reduction being driven by fresh short-selling.