OPEC and the price of oil: Who will hold all the cards in the final game of Top Trumps?

The battle for market share in today’s oil market and the internal battle within OPEC is much like the 1970’s card game Top Trumps in which the aim of the game was to compare the numerical values on your opponents cards and then to try and trump and win their cards. The winner eventually declared when he or she had taken all the other players cards (more on that later).

But first, perhaps it shouldn’t have been a surprise.

Unlock commodity market insight now and subscribe to our email updates, follow on Facebook or

Just as the drop in oil prices completely wiped out all the gains since mid-August headlines reported that the cartel-like organisation was embarking on one final diplomatic push to secure a cut in oil production. Just two weeks before the group’s meeting in Vienna, Saudi Arabia, Iraq and Iran are still at odds over how to share production cuts.

It was back on 11th August that Saudi’s Energy Minister first suggested that the group would meet to discuss possible actions to stabilise the oil market. Ever since then whenever oil prices fell sharply on fears that the group would not live up to their promises and short positions in the futures market were at their most extreme, one or another OPEC representative would intervene to help buoy the market. And yesterday was no different.

See this analysis from Morgan Stanley prior to the latest round of verbal intervention.

OPEC can still spook markets. Although OPEC’s actions have not matched its words (i.e. promoting the need for production restraint while quietly growing production), the cartel has become adept at talking up declining markets. The group has repeatedly made bullish announcements about OPEC intervention during periods of low liquidity (e.g. US holidays), and whenever short positions become large. Despite the fact that many investors are skeptical of OPEC’s ability to change the outlook, prices still move on these headlines. Investors have proven that they are not willing to press short positions against OPEC, even if the odds of intervention are low. In essence, this is similar to the old adage of “Don’t Fight the Fed.”

We’ve highlighted before that you can only cry wolf so many times before the market loses interest. Surely they are going to have to follow through on their promises now or face losing all credibility while oil prices plunge?

Related article: Crying wolf: For OPEC talk is cheap

Earlier this week BMI published a note estimating a 45% probability of a “wait and see” stance and no deal on output cuts. This seems much too high.

First, OPEC would not have factored in Trumps’ victory in the US elections.

The short term impact thus far has been a strengthening in the US dollar which has also contributed to the fall in the price of oil, which if as many expect the dollar bull run has much further to run then the headwind to oil prices will intensify.

Trump’s victory puts Iran in a much weaker position now. If Trump tears up the agreement to remove sanctions from Iran then the ability of Iran to increase exports is weakened considerably.

Trump has also indicated that he wants the US to wean itself off Middle East oil completely. Although this is always likely to be completely impractical (many refineries are built to use just the type of crude oil that Saudi’s and others supplies) it presents a much more confrontational edge to the relationship.

Secondly, all OPEC members badly need higher oil prices to help reduce funding costs – from food shortages in Venezuela to an increase in the cost of insuring debt in Saudi Arabia.

According to PIRA failure to implement a deal could see prices fall as low as $35 per barrel, while $60 per barrel could be seen if the group is successful. BP, speaking before the latest verbal intervention were less pessimistic saying “You see that in the price,” he said. If the talks fail, prices “will stay around the level we’re at [~$43 per barrel].”

Finally, and most importantly they have to cut. Since first noting the groups attempts to try to stabilise prices OPEC has embarked on doing exactly the opposite, increasing output as much as possible so that when they do have to cut they are the ones holding all the cards. OPEC can’t keep playing this game of Top Trumps forever. If they don’t stop, their credibility will be shot and the game will just not be worth playing anymore.

2016-11-16_0610

 

Buy the book Commodities: 50 Things You Really Need To Know from Amazon (US and UK), iBooks, Barnes and Noble, Google and Kobo.If you like the book please leave a review on Amazon. Reviews really do make a difference. Thanks.

What does a Trump Presidency mean for commodities?

In a line – Risk off in the short term, but potential tailwind for commodities developing (particularly base metals and silver).

As Trump appears to have won the US Presidential race what next for commodities? Not surprisingly gold and silver have been the main beneficiaries, while crude oil and lead prices are the biggest losers thus far.

Unlock commodity market insight now and subscribe to our email updates, follow on Facebook or

Despite the shock, precious metal prices are still some way below the highs they achieved back in July. And perhaps here market participants have learned from the aftermath of the Brexit vote. After the initial shock its possible that Trump’s bellicose rhetoric is toned down and that the perceived negative impact on US growth and trade policy is not as bad as feared.

Remember that a drop in the US dollar is positive for commodities in general. Metal prices, particularly lead, nickel, copper and silver benefit from a fall in the dollar.

What are the medium to longer term impacts?

Oil / Natural gas: Oil prices have dropped sharply on the news. Attention will now turn to OPEC who will be under a lot more pressure now to deliver something meaningful at their late November meeting. Longer term, although keen energy independence Trump may take a much stronger tone with Iran and other parts of the Middle East.

As Trump expands support for the USA’s coal industry the switch towards higher gas consumption is likely to stall, while an increased focus on energy independence could see higher natural gas supply.

Industrial metals: If growth in the US slows it will be negative for industrial metals like copper and aluminium as demand from construction and automotive sectors slows. However, calls for more infrastructure spending could be a boon for metal demand as the country’s aging infrastructure is updated.

Energy metals: Trump has surrounded himself with advocates for traditional energy sources and climate change skeptics. This may lead to reduced investment in renewable energy sources in the US and electric cars. Together this may reduce demand growth for ‘energy’ metals such as lithium, cobalt etc.

Agricultural: Commodities like sugar, coffee and soybeans are likely to fair the worst as emerging market currencies like Brazil’s fall against the US dollar. A fall in their currencies increases the incentive to export.

Although the uncertainty over Trump’s Presidency is likely to mean the prospect of an interest rate hike is off the table in December, interest rates may have to go up much further than people realise in the longer term. The drop in the US dollar combined with expansionary fiscal policies could mean that inflation jumps much higher. Again, Brexit provides a snapshot of where the US could be with rising input pressures.

Worth remembering also that longer term most commodities typically do worse on average under Republican presidents, grains including corn, wheat and soybeans tend to do better under Republican presidencies.

One final observation. Market attention will now turn to the Italian referendum on 4th December. The populist movement may not be done just yet.

Buy the book Commodities: 50 Things You Really Need To Know from Amazon (US and UK), iBooks, Barnes and Noble, Google and Kobo.If you like the book please leave a review on Amazon. Reviews really do make a difference. Thanks.

Copper market close to breakout? Four factors to follow

Copper has been a bit of an enigma in 2016 so far. While other base metal prices have surged on the back of supply cuts and strong demand, copper has languished been broadly flat. Prices have consolidated over the past few months around 215 c/lb but the market is likely to break out towards the end of the year.

But which way? According to Commerzbank copper has the potential to play catch-up with other base metals through to the end of the year. However, Goldman Sachs believes that the direction is down with prices forecast to fall below the 7-year low set in January. Here are four factors to consider.

Unlock commodity market insight now and subscribe to our email updates, follow on Facebook or

A wall of supply: It was in October 2013 that Goldman Sachs started to warn that copper was transitioning into a supply-demand surplus. “For copper, Chinese demand was never the problem. Instead, it is weak demand ex-China against new supply growth that has held copper prices back, and is on the verge of creating an oversupplied market,” the bank said in a report.

A view that the bank have reiterated recently. “Over the next three to six months we believe that copper will continue to under perform zinc, with copper about to hit a wall of supply, while the zinc concentrate market continues to tighten.”

For Goldman, the main expansion in mine supply through to the first quarter of 2017 is expected to come from the Grasberg mine in Indonesia, Escondida in Chile and Sentinel in Zambia, according to the report. Growth from Cerro Verde and Las Bambas in Peru (the latter one of the main engines of supply growth in 2016) may also contribute.

Unlike previous periods where oversupply has gradually been eroded, setting the market up for a rebound it may just be the case that the scale of boom in prices in the period to 2011 now means that there is just so much more supply to be weaned off.

Related article: Copper and oil prices: Lower for a bit longer?

Disruptions to copper supply have been low so far in 2016, affecting less than 2% of supply, versus expectations near 5% has helped contribute to the poor price performance. A return to ‘normal’ levels of disruption could take the shine off new supply coming on-stream in 2017.

2016-10-27_0604

Related article: Copper prices: The top 10 most important drivers

China:China’s copper demand has grown by around 3.5% this year, fueled by a boom in property, power grid investment, white goods and vehicles. The outlook for copper in the coming months is also looking positive according to Macquarie’s China copper survey, which interviews smelters, traders and fabricators who are active in China. Fabricators and traders have expressed intentions to build inventories while smelters are restocking raw materials.

Chinese imports of refined copper have declined over the year as Chinese output has increased. However, China may also step up refined copper imports in coming months as the weaker yuan has boosted domestic copper prices, opening up arbitrage opportunities.

The potential downside to Chinese demand relates to China’s efforts to cool its property market. For the first time China’s Politburo has signaled a policy shift to control asset price bubbles (report) and after bubbles in everything from their equity markets, to commodities and various other assets property is now the focus of attention.

Although the change in emphasis is significant the impact on overall Chinese copper demand may not be all that severe (although there could be a sting in the tail). First, previous attempt to cool the property market have taken many months and since construction activity and hence copper consumption tends to lag prices the potential is for further strong demand in the short term. Secondly, construction accounts for a relatively small amount of overall Chinese copper demand – 15% compared with around 50% for power and 35% from manufacturing.

The potential sting in the tail is that efforts to curb the boom in property prices spills over into the broader economy. Just as Chinese authorities efforts to prevent the boom in the country’s equity market sparked fears of a broader slowdown, a sharp drop in property prices is likely to have a much larger impact since property forms a much larger component of the average Chinese citizens wealth.

US infrastructure spending: Prices of the metal, used in pipes and wiring rose after a recent report showed sales of new US homes held close near to a 9 year high. But could the outcome of the the US Presidential election be even more supportive? Both candidates have acknowledged the poor state of the country’s infrastructure. Trump has indicated that he will roll out more proposals in the near future but has stated that his plan will boost the U.S’s infrastructure. In contrast, Clinton’s plan would amount to roughly $60 billion per year in spending on transportation projects. The three metallic resources that would be expected to gain most from this would be aluminium, steel and copper.

Technical: Copper has been trading in a symmetrical triangle since the start of 2016. This typically means a period of consolidation, but once the price moves out of the triangle (and is followed by an increase in trading volumes) a sharp breakout price movement tends to follow. But which way?

The 5-wave increase in copper prices at the start of the year might indicate that the breakout is towards the upside. On the other hand the market is very vulnerable to the downside too. Below 208.50 cents per lb there is little support before prices touch the earlier low of 197 cents per lb and if prices were to fall below 200 cents per lb that would break a long term upward trend stretching all the way back to 2002 – a move that would provoke further selling.

Buy the book Commodities: 50 Things You Really Need To Know from Amazon (US and UK), iBooks, Barnes and Noble, Google and Kobo.If you like the book please leave a review on Amazon. Reviews really do make a difference. Thanks.