Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Chinese Economic Woes Drag Down Crude Oil and Copper
Ole Hansen
Head of Commodity Strategy
Key points
- Brent slumps to near key support as demand worries more than offset a Libyan supply disruption
- Copper futures trade sharply lower, retracing a major portion of their August bounce
- Both commodities under pressure as China's economic slowdown shows little sign of improvement
- Large speculators have for a while maintained a cautious stance towards both
UPDATE: Since posting this update, Brent and WTI crude oil futures have slumped further, thereby challenging key support. Driven by news that Sadiq Al-Kabir, the govenor of the Libyan central bank, who has been at the center of a recent power struggle between the nation's rival governments has been out saying that there are "strong" indications the political factions are nearing an agreement to overcome the current deadlock, potentially allowing a resumption of crude oil production.
The crude oil market sentiment remains under pressure as China's economic slowdown shows little sign of improvement, following data showing a further contraction in factory activity and a deepening property crisis, compounded by the rapid adoption of EVs and hybrid cars, which is reducing fuel demand. This has led to lower refinery runs and diminished overall oil demand. Refinery margins, a key driver for crude demand, remain weak in both Europe and the USA, with New York ULSD (Diesel) and London ICE gas oil both trading at their lowest levels in over a year.
Meanwhile, an ongoing disruption in Libya, where production has slumped by up to one million barrels per day over the past week, is surprisingly not having a positive impact on prices. This further underscores the current weak sentiment, which increasingly threatens Brent and WTI’s ability to hold above key support levels that have been in place for more than a year.
Continued price weakness, driven by a softening demand outlook, has left OPEC increasingly isolated with their optimistic forecast of over 2 million barrels per day in demand growth for this year. This projection is more than double the IEA’s forecast of less than one million barrels per day. While the Libyan disruption might have opened the door for OPEC+ to proceed with their planned production increase—starting with 180,000 barrels a day from next month—the risk of prices falling further below the group’s desired and increasingly elusive target of USD 90 per barrel Brent may now compel them to reconsider or postpone this decision.
The Brent crude oil futures contract is currently trading near USD 76, and just above key support in the USD 75 area, a break below which may attract fresh momentum selling and a move towards the next major area of support around USD 71.
Copper futures in London and New York trade sharply lower for a second day, with prices on both exchanges having by now retraced more than 0.618 of their August bounce, potentially even challenging the early August lows and our belief that the worst of the May to August correction was behind us. Just like crude oil, copper and other China-demand-dependent industrial metals continue to struggle amid an increasingly disappointing economic recovery in China, leading to ballooning inventories that in recent weeks have been shipped abroad to LME and New York exchange-monitored warehouses, thereby adding downward pressure on global prices.
With China’s 2024 growth forecast of 5% increasingly in doubt, even strong demand from the renewable industry has not been enough to arrest the slide in demand amid lower demand from the construction industry. Developments that have seen Goldman Sachs, up until recently a major copper bull, turning more cautious on the price outlook, slashing their 2025 average price outlook for LME copper by one-third to USD 10,100 per tonne.
The prospect of lower dollar funding costs as the Federal Reserve embarks on a rate-cutting cycle that, given current expectations, could see US Fed Funds fall to 3% by January 2026, could still see demand stage a rebound as industry groups restock and projects become more affordable, not least the push towards electrification, which in the coming years will account for an increasing share of global demand for copper.
The HG copper future trades back below its 200-day moving average after suffering a two-day slump to USD 4.07 per pound, with key support found around USD 4.03 per pound followed by USD 3.93 per pound.
Large speculators, such as hedge funds and CTA’s, have for a while maintained a cautious stance towards both crude oil and copper. Before returning as net buyers during a two-week period to August 27, funds had slashed bullish copper bets by around 90%, while the combined net long in WTI and Brent has been hovering just above 200 million barrels, a level that has been seen as a low point on several occasions since 2011 when the ICE exchange began publishing Brent data.
Recent commodity articles:
2 Sept 2024: COT: Commodities see broad demand as the USD slumps to a net short
30 Aug 2024: Commodities sector eyes fourth weekly gain amid softer dollar and Fed expectations
27 Aug 2024: Month-long sugar slide pauses amid concerns of Brazil's supply
27 Aug 2024: Libya supply disruptions propel crude prices higher
26 Aug 2024: COT: Funds boost metals investment as dollar long positions halve amid weakness
23 Aug 2024: Commodities Weekly: Metal strength counterbalancing energy and grains
22 Aug 2024: Persistent supply contraints keep cocoa prices elevated
21 Aug 2024: Weak demand focus steers crude towards key support
19 Aug 2024: Resilient gold bulls drive price to fresh record above USD 2500
19 Aug 2024: COT Buyers return to crude as gold stays strong; Historic yen buying
16 Aug 2024: Commodities weekly: Gold strong as China weakness drags on other markets
9 Aug 2024: Commodities weekly: Calm returns to markets, including raw materials
8 Aug 2024: Sentiment-driven crude sell-off eases, allowing traders to focus on supply risks
7 Aug 2024: Limited short-selling interest observed during copper's recent aggressive correction
6 Aug 2024: Video: What factors are fueling the current market turmoil and gold's response
5 Aug 2024: COT: Broad commodities sell-off gains momentum; Forex traders seek JPY and CHF
5 Aug 2024: Commodities: Position reduction in focus as volatility spikes
2 Aug 2024: Widespread commodities decline in July, with gold as the notable exception
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