Reasons why oil and copper might rally soon
Find out what's moving commodity markets and some potential positive catalysts.
30th May 2019 11:33
by Rajan Dhall from interactive investor
Find out what's moving commodity markets and some potential positive catalysts.
Commodities markets have faced a slightly different problem this past week, dollar strength. The dollar has been relentlessly strong in recent sessions, moving from 97.55 to a high of 98.24 in the dollar index (DXY).
In the background, the trade war rhetoric still lingers and the issues have been compounded by the US imposing technological restrictions on Chinese mobile phone giant Huawei. This is a secondary issue to copper and oil markets, but we must remember that base metals will be affected as chip components are made from basic materials and some precious metals.
There is a strong resistance level in the dollar index to be aware of at 98.37. From an equities perspective, base metals producing companies like KAZ Minerals (LSE:KAZ) and Anglo American (LSE:AAL) have taken a battering. This makes macroeconomic and political news all the more importing for portfolio watchers.
Trump's Twitter feed is now proving to be an important financial news source, but Chinese comments can be somewhat unreliable.
Source: TradingView Past performance is not a guide to future performance
West Texas Intermediate (WTI) oil futures managed to find support at the 38.2% Fibonacci level, which happened to confluence with the support level marked on the chart at $57 per barrel.
Price action looked bearish at the start of the week but the fall in American Petroleum Institute (API) inventory levels last night supported the price from the $56.88 per barrel low.
The market was expecting an 857,000-barrel drawdown, but the figure surprised analysts, delivering a whopping 5.265-million-barrel reduction. Even with this week's draw included, the net build is still a significant 26.65 million barrels for the 22-week reporting period so far this calendar year. With issues in Iran about to come to the boil again, another rally is possible.
Source: TradingView Past performance is not a guide to future performance
The technical picture for copper is still looking soft. As you can see on the chart, the most prominent support level is the one seen at the beginning of the year at $2.54 per pound, and it seems prices may heading there this year once again.
London Metal Exchange (LME) and Shanghai inventories have slowly fallen in the background, but demand may be set to change as the classification restrictions on the grading of copper may change in China.
But the good news is that demand from China is still robust after sales of air condition units increased following a bout of hot weather. We could also see a strike at top copper producer Codelco's massive Chuquicamata mine. That's after three unions at the mine rejected the company's final offer for a new contract on Wednesday and approved a strike.
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