Commodities & Currencies
The commodities market is taking a wallop across the board today. It seemed to start earlier this week with oil dropping on fears over weakening Chinese GDP. Weaker growth would mean less demand for oil. Now, those fears have spread across most of the commodities market, with metals currently selling off strongly on the same fears. The renewed selling follows losses nearing 20% in industrial metals over the last month.
FINSUM: Remember that commodities markets are often a leading recession indicator, so this data does not bode well. Though in this case, it seems to be GDP data leading commodities, which is a bit back-to-front.
The oil market is continuing to experience some deep tremors after a great year. The oil benchmark dropped another 1% yesterday, bringing prices down to their lowest level in three months. After months of rising on concerns of weak output, the market is plunging on the threat of oversupply, especially from Russia and OPEC countries. Additionally, the IEA put out a report saying it saw global oil demand falling, another factor which weighed on the market. In addition to worries about rising supply and weakening Chinese GDP, Commerzbank commented that “The unexpected increase in U.S. crude oil stocks by 629,000 barrels reported by the API is generating headwind, as is a sharp rise in Russian oil production”.
FINSUM: It is starting to feel like the tide might really be turning on the oil market, which has had a great 18 months.
The oil market has been doing very well for the last year and a half or so, and has performed especially strongly in 2018, outperforming every major asset class. However, US oil prices fell over 4% yesterday on growing fears of a boost in supply, following a 5% drop last Wednesday. Most of the gains in the market over the last 18 months have been because of coordinated supply cuts by world oil powers. However, while there still are some supply constraint issues on the table (e.g. US sanctions on Iran), the increasing worry is that production may rise more than expected, which would bring prices back down. Further, the US is indicating it may start to use some of its strategic oil reserves in order to avoid another sharp move higher in prices.
FINSUM: To be honest, we have been surprised by how well OPEC has been able to hold the output cut alliance together, so we really should not doubt their ability to continue to do so. That said, we do see at least a plateau coming in prices.
Investors in oil need to be aware—the market is increasingly looking like a price surge is in store. Supply constraints are currently looming over the market, which has pushed prices to a 3.5 year high. Now, some are calling for a spike that would take oil to $150 or, almost double the level of now. The call comes from renowned research house Sanford Bernstein. The logic is that the oil price tumble over the last few years has caused “chronic underinvestment” in supply which will power the next “supercycle”. According to Bernstein, “Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008”.
FINSUM: The view here seems sound. However, we must saw\y that there is one overarching logic that bothers us about this call—that the world has bountiful oil that has becoming ever cheaper to extract. That makes us think supply constraints could be overcome more quickly.
Despite all the fears over a trade war, recession, and bear market, there has been relatively little media chatter surrounding gold. Gold is usually seen as a good hedge to political and market calamity, and while it has seen some gains, there isn’t the usual excitement that surrounds it. All of that may be good news, however, for stocks as the spread between gold and platinum suggests the equity bull market has more room to run, according to a pair of professors from Cornell and USC. The gold-platinum ratio reflects both industrial demand and investor anxiety, and when it is high, it tends to indicate that stocks will perform well.
FINSUM: There are a lot of factors that go into the price relationship between two commodities, so it is hard to draw a conclusion for a third asset class. That said, the logic underlying this argument seems sound.
The energy market has been doing well and some argue that the world is in the middle of an oil shock, or a condition where prices are very elevated because of a lack of supply. With that in mind, Goldman Sachs has published a piece choosing a couple stocks for investors to play the current oil market. The two stocks are Chevron and Canadian Natural Resources. Both have been laggards recently, but that helped them get the “Buy” rating from Goldman. The bank does not doubt Chevron’s ability to execute (unlike the market), and thinks that the announcement of some new projects will help propel the stock.
FINSUM: Hard to believe we could be in an oil shock when only recently it seemed we had an overwhelming glut.