• Commodities have been sailing into headwinds over the last few months; stronger dollar, higher US interest rates, falling EM currencies and above all the threat of trade tariffs damaging global growth, especially that of China and the emerging world who are the most ‘commodity hungry’ economies.
  • I was born in Yorkshire, God’s own country, so I’m never wrong; sometimes I’m not quite right for rather a long time but I’m never actually wrong. Oil is shaping up to be case in point. I’ve been arguing for years that oil will trade in a $40/bl to $60/bl range and here we are with Brent sailing through US$80/bl despite nervous markets in other commodities.
  • My predicted US$40/bl to US$60/bl range was governed at the lower end by the breakeven cost of US shale and OPEC’s desire for higher prices and at the upper end by a rapid increase in shale productivity and capacity. What has changed is a convergence of interests between Saudi Arabia and Russia on the subject of the oil price (keeping them very high) while shale capacity increases have not been as dramatic as might be expected. This is partly for geological reasons and production bottlenecks but also because of some corporate discipline (not a given in the oil business!) with shareholders more interested in steady dividends than gushing wells.  Such has been the compliance to the OPEC production cuts that the oil glut of a year ago has all but vanished at a time when demand is outstripping forecasts in most geographies. Throw in a collapse in Venezuelan production, plenty of ‘geopolitical uncertainty’ in the Middle East, the re-imposition of US sanctions on Iran in November and bingo you’re charging through US$80/bl, the highest price for four years.
  • Gold continues in the doldrums, down from US$1350/oz. at the beginning of the year to the current level of US$1200/oz. The inverse relationship between the dollar and gold is a recurrent theme; gold is priced in dollars so a stronger greenback makes it more expensive for holders in other currencies. Similarly, the higher interest rates in the US are negative for the yellow metal as Gold is an asset that pays no interest, behaving in effect as a zero-coupon perpetual index-linked bond. With US rates rising to a level higher than inflation then gold suffers by comparison.
  • The copper price has fallen nearly 20% from its high a year ago, worrying because Copper has widespread application in homes, factories, electronics and power generation so its price is frequently viewed as a barometer of general economic health. Other base metals have been similarly weak over the summer months, again reflecting concerns of a slowdown in economic momentum, particularly in China which is such big commodities importer.

Summary: Oil prices remain firm reaching US$80/bl and prompting a significant rally in energy stocks. Gold has weakened in the face of higher interest rates and a strong US dollar. Mining shares have suffered from the sharp fall in base metal prices and need continuing evidence of robust economic growth to make further significant gains.

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