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Chinese Economic Slowdown Shakes Global Oil and Copper Markets
China's Economic Woes: A Double Whammy for Oil & Copper
Erwin Dwight
September 26, 2024
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The Ripple Effect of China's Economic Struggles on Oil and Copper
The global commodities market is feeling the heat as China's economic slowdown persists. Despite initial hopes for a strong post-pandemic recovery, recent data paints a bleak picture. Both crude oil and copper—two key commodities reliant on Chinese demand—are experiencing significant downward pressure, influenced by a combination of weak industrial output and a deteriorating real estate market.
China’s Economic Weakness:
Factory activity continues to shrink.
The property market crisis is deepening.
Rapid adoption of electric vehicles (EVs) and hybrids is lowering fuel demand.
This has led to a downturn in oil demand, with Chinese refiners cutting back on crude processing and stockpiling inventories at an unprecedented rate. For copper, the effects are equally dramatic. The slowdown in construction has outweighed the rising demand from renewable industries, further dragging down copper prices.
Crude Oil Faces New Challenges Despite Libyan Disruptions
Brent Crude Oil, a key global benchmark, has fallen sharply, nearing critical support levels. Normally, a supply disruption like the one happening in Libya—where production has dropped by a million barrels a day—would boost prices. However, the market remains focused on weakening demand, especially in China.
Key Developments:
Libyan Political Situation:
While a potential agreement between Libya's rival governments may stabilize the political situation, it could also increase oil supply if production resumes, adding downward pressure on prices.
China’s Declining Demand: The reduction in refinery runs, coupled with weakening margins in the US and Europe, has hurt crude oil prices. This signals a broader global demand issue, pushing Brent to trade near USD 76, with the risk of breaking below key support at USD 75.
The Organization of Petroleum Exporting Countries (OPEC) finds itself in a tricky position. Their optimistic projection of 2 million barrels per day in demand growth for this year looks increasingly out of step with reality. Even though they had planned a production increase, the current market conditions might force them to delay or reconsider.
Support Levels to Watch: If Brent breaks below USD 75, expect further momentum selling, potentially pushing prices down to the next support area near USD 71.
Copper’s Struggles as China's Growth Falters
Copper, another China-dependent commodity, is also grappling with price declines. As one of the most industrially significant metals, it is closely tied to the health of the Chinese economy. Copper prices surged in August, but the rally has since fizzled, with London and New York copper futures retracing more than 60% of their gains.
Why Is Copper Falling?
Ballooning Inventories:
Sluggish Chinese demand has led to an oversupply of copper, with inventories piling up. These excess stocks are now being shipped abroad, especially to London Metal Exchange (LME) and New York warehouses, putting even more downward pressure on global prices.
Construction Industry Woes:
While demand from the renewable energy sector remains strong, it’s not enough to offset the declining demand from construction, which is a major copper consumer.
Goldman Sachs Turns Bearish:
Up until recently, Goldman Sachs was bullish on copper. However, faced with disappointing data out of China, they have revised their price outlook downward, slashing their 2025 forecast by a third to USD 10,100 per tonne.
Support Levels:
Copper prices have dipped below their 200-day moving average, falling to USD 4.07 per pound. Watch for key support levels around USD 4.03 and USD 3.93 per pound.
Speculators Stay Cautious
Large speculators, including hedge funds and Commodity Trading Advisors (CTAs), have been treading carefully when it comes to both crude oil and copper. Their cautious approach reflects broader concerns about the global economy and commodities demand.
Crude Oil:
Funds have kept net long positions in Brent and WTI just above 200 million barrels, a level that has historically marked low points for the market since 2011.
Copper Bets:
Before a brief recovery in late August, bullish copper bets had dropped by 90% as traders grew wary of the ongoing correction.
Potential Silver Linings for Commodities?
While the near-term outlook remains gloomy, there are some longer-term factors that could support a recovery in both copper and oil markets.
Federal Reserve Rate Cuts:
Lower US interest rates could spur economic activity, making projects more affordable and boosting demand for industrial metals like copper.
Electrification and Renewable Energy Push:
The growing global focus on renewable energy and electrification means that copper demand, particularly from these sectors, will likely see a long-term boost. This shift could help offset some of the losses from construction and other traditional industries.
Conclusion
Both oil and copper markets are navigating a difficult period, primarily driven by China's underwhelming economic recovery. Crude oil has lost its upward momentum despite supply disruptions, while copper is grappling with surging inventories. For now, speculators remain cautious, waiting to see how the situation unfolds.
As these commodities hover near crucial support levels, further weakness could lead to a larger selloff, making the next few weeks critical for the global commodities market.
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Disclaimer: This newsletter is for informational purposes only and should not be construed as financial or political advice.
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