Commodities swing into 2016: China sends shockwaves through commodity markets as copper falls and oil prices wobble on Middle East tension
The new year started with a bang, as China worries wiped value off stock markets around the world, copper prices were squeezed and oil oscillated following an escalation of tensions in the Middle East.
The glum start to the year means more uncertainty for commodity markets, already badly battered from last year, when a basket of base assets including everything from oil and gold to platinum and copper fell to an 11-year low. We take a look at the prospects for two of the big boys: oil and copper.
OIL
Oil prices swung sharply as the year opened after Sunni-led Saudi Arabia and three of its closest allies cut diplomatic ties with Iran. Iranian outrage over Saudi’s execution of prominent Shia cleric sheikh Nimr al-Nimr led to the storming of the Arabian embassy in Tehran. Iran’s Shia leadership has warned the execution would “cost Saudi Arabia dearly”.
The price of Brent crude rose 3 per cent as the drama unfolded, touching $38.50 a barrel. Prices then fell as the fall-out from China’s stock market suspension bedded in.
This latest spike in geopolitical risk may make it harder for the Organisation of Petroleum Exporting Countries (Opec) – which is already struggling with inter-group wrangling – to reach a consensus on appropriate oil production levels. “Saudi Arabia might now be even less willing to cut its own output to support oil prices if Iran would be a major beneficiary,” said Julian Jessop of Capital Economics.
Meanwhile, oil supplies remain high. Black gold touched 11-year lows at several points last year, amid one of the worst supply gluts in history, but Opec was at stalemate during its bi-annual meeting in December.
Calls for the grouping to set lower production levels came most loudly from Venezuela, which has struggled to make ends meet while the price of its chief export stays low. The calls were resisted by Saudi Arabia, as even though it has found low oil prices tough, it has openly stated its determination to keep supply levels high and thus prices low, to crush competition from the US’s shale oil industry.
Opec failed to set a production target and Brent slid steadily from around $50 to trade closer to %36. However, the Saudi Arabia-Iran outburst does mean oil prices may have found a floor – although it’s unlikely to cause any real boost to prices, says Jessop.
COPPER
Copper prices fell 2 per cent yesterday, and other base metals also tumbled, following news that China’s factory activity contracted for the tenth consecutive month in December. The reading of 48.2 from the Caixin Manufacturing Purchasing Managers index was below market expectations and another reminder that the giant is padding along at a slower pace. The gauge is closely watched as it covers smaller and medium-sized companies which official data does not, and fills a gap in knowledge of what’s going on on the ground.
Although it was not much of a surprise – this measure of factory activity has been falling for nearly a year now – copper traders took the news badly, as China is the world’s largest consumer of industrial metals. But more than that, falling copper prices have been an on-going theme for some time now. Prices peaked in 2008 at the height of China’s construction boom.
“The downward trend for copper has been there for a number of years now and is here to stay,” says David Madden of IG. “It is largely driven by China… its economy and industrial activity is cooling off, with demand for minerals and high-grade copper nowhere near what it was a few years ago.”
The red metal is so closely correlated with global economic growth that it has come to be known as “Dr Copper”, since it rises and falls in tandem with industrial activity. This year, the great unknown for market confidence remains the global growth outlook, says John Bilton of JP Morgan Asset Management. This may be the decider of where commodities go next.