The current rally in oil prices does seem coated in Velcro as it ticks higher gathering new material to its cause. Issues that are not exactly fresh, become more poignant and relevant in the face of such a decisive move. Problems are still percolating in South Sudan, as reported on Bloomberg, that pumping facilities to the one thousand mile pipeline to the Red Sea have failed, depriving the world of some 150,000bpd which according to the report is usually destined for Asian markets. The issue lies in its neighbour, Sudan, and because of the continued civil-war any repairs might still take some time and a state of force majeure still exists on South Sudan’s exports according to the Sudan Tribune.

The precursor to the EIA US Inventory Report, the APIs, are then received from a bullish point of view. Even though Gasoline came in close to predictions and drew by 1.6mb, the draw in Crude of 1.5mb and only small builds in Distillate and at the storage hub of Cushing, the idea of a tight market remains very much on the minds of the oil sect. The refinery issues faced by Russia continue to help keep Gasoline buoyant and M1 RBOB futures have now made new year-to-date highs for five-consecutive days. With Russia now having to export backed-up crude inventory of 260kbpd in addition to planned exports and now totalling 2.2mbpd from Western Ports, the Ukraine drone damage continues to cause headaches for the Russian oil sector and those trying to plot what it all means for crack values and even OPEC relations.

However, progress today will be governed by how the wider suite will digest and is digesting the phalanx of central bank decisions. This morning’s PBoC decision to keep the 1-year and 5-year Loan Prime rates at unchanged might have been received rather more unfavourably, but there are bigger fish to fry in the market which comes in the guise of US FOMC rate decision later. Some market quarters are now expecting only two rate cuts for 2024, reduced from the predicted five at the end of last year and because of it the US Dollar has seen greater interest. Sitting just shy of 104.00, the US Dollar Index (DXY) is now at a one-month high and if such migration continues into the defensive risk hedge, progress for oil prices will start to find resistance.
 

As a general rule of thumb, the price of copper has indicated the state of the global economy’s fortune particularly where it sits as a gold alternative but mainly in its industrial uses in manufacturing, electrical engineering, info-tech, medical and of course the building sector. Historically, correlation between the metal and oil are self-explanatory. Booming economies create demand for these industrial components, bust and recession surpluses and the extraction and smelting of copper has heavy energy use which also adds to the relationship in their fortunes.

‘Doctor Copper’ as it is colloquially referred to in markets, granted its Ph.D. because of an uncanny knack in predicting when economies might be turning, has seen something of a renaissance of late and brings into speculation as to whether we are about to embark on the bull commentators’ shibboleth, a commodity super cycle. Such notions are not without merit, bearing in mind oil’s year-to-date highs, cocoa’s West Africa flooding pre-Easter progress, corn’s one-month correction and cotton’s rally away from December 2023 six-month lows, yet such a cycle is a big call in the face of stubborn interest rates and a prohibitively strong US Dollar.

3-month LME Copper traded down to $8168/MT in early February of this year, from $9324/MT in January 2023 after the ending of zero-COVID in China and the ensuing cascade of disappointing data that quashed the hopes of a roaring Asian trading giant coming back in a build, buy and burn stuff campaign. In this spirit of looking for correlation, the price of copper has for some time been inextricably linked with house prices in China. Apart from May and June last year, the House Price Index, which is measured on a year-on-year basis, has fallen for nearly two years and the resultant pressure on copper is plain to see. However, there is something of a change going on, the House Price Index in February fell 1.4% year-on-year which is the most for thirteen months, yet copper has rallied from the February low to close at $9089/MT as of March 18.

Much of the rally can be attributed to mining issues in far-flung places such as Panama and Zambia and the possibility that smelters will cut production because of the high inventories in China. However, where this all becomes interesting for those of us that look at the world from an oil bent is that copper seems to be running in alignment with the recent rally of oil. It is also very interesting in that oil is inspired by the refining capacity lost by Russia due to the drone strike from Ukraine affecting the lighter end of the barrel already tightened by issues at the gasoline production unit at the Texas Port Arthur unit in front of the ‘driving season’. Gasoline will always be at the mercy of seasonal influences, and this is where we arrive at the point of this muse. Will it always be so and, in some ways, will copper be more relevant to the driving habits of global road warriors?

At the beginning of the year forecasters including Bloomberg Research congregated around a 2024 value of 20% as the portion of which EVs will claim as global vehicle sales. The Mobility report of S&P Global has that the auto industry's transition to EVs is accelerating. The year 2026 has emerged as a tipping point for an acceleration in EV adoption that will drive automotive electrification trends ahead. By 2030 over one in four new passenger cars sold will be an electric vehicle as many major vehicle manufacturers worldwide have signalled the end of an era of internal combustion engines. Is this it then, is this when Doctor Copper is telling us to sell gasoline and buy copper? EVs are copper dependent and so is the infrastructure needed to juice them, therefore it is fair to plot where the world is at in terms of the size of migration to EVs and the effects on gasoline/oil and metals used in green energies.

Yet, this tipping point seems a little ambitious in the face of even the loudest harbinger to the end of fossil fuels, the IEA. Its global oil demand growth in 1Q24 forecasted to rise by a higher-than-expected 1.7mbpd and that demand for Gasoline in 2024 would be 27.165mbpd, 763kbd higher than 2023, even in the face of headwinds such as global turndowns in economies, improved vehicle efficiency and expanding EV numbers. Here in the UK owning EVs comes with a certain amount of anxiety. Notwithstanding concern over the range of battery vehicles, purchase prices are higher than that of internal combustion cars, forty per cent of houses do not have off-street parking and the amount of public charging points particularly on motorways is frankly laughable. Like-for-like January 2023 versus 2024 has seen a fall in sales by some 25%, not just only for the disquietude listed above but also as the ‘plug in’ public grant to aid in conversion has ended. Such issues can only find sympathy around the world.

Cabling, mobile phones, computers, EVs are set to be formidable drivers in prolonged demand for copper and this demand can only be keener if, and when the global economy begins to pull in unison of growth. But surely, that growth is also true of gasoline/oil for the world is not yet at the point where one can be a complete supplant for the other. Strangely, as the uses for copper increases and with it demand, inflated prices for poor man’s gold will keep elevated the cost of EV conversion and possibly grant an extra longevity prop to gasoline use. This is of course with an assumption that battery-powered vehicles will definitely win out to other technologies from internal combustion migration. Doctor Copper’s economic signal may be that it will not only haul itself to elevated levels but might drag oil prices with it and maybe their correlation is not about to diverge anytime soon. Or, that it just smells an end to global monetary tightening. Don’t look now, but are we circling back to consider a commodity super cycle?
 

Overnight Pricing

john.evans@pvm.co.uk

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