Oil and Copper: Bottoming Process in Play?

Oil and copper have been forming chart patterns that suggest a bottoming process for them. That could be encouraging, in that oil and copper are important general economy inputs.

Consumption of oil and copper would precede the output of goods that utilize those commodities in their manufacture. That suggests the general concept that commodity prices should show recovery a bit before manufacturing shows share price increases, because the growth in sales and profits of manufacturing comes somewhat later in time

It is possible that the basing behavior is more a function of production cut backs or stockpiling than an indication of increased consumption. China, for example, has announced plans to stockpile industrial raw materials now while prices are low for use later when prices are higher.

In any event, oil and copper are looking better.

click images to enlarge

West Texas Intermediate Crude

The chart shows oil testing key resistance.

Copper

Copper has broken key resistance.

Gold

This counter-cyclical commodity is preparing to test support.

The combination of industrial inputs (oil and copper) rising, with a counter-cyclical, fear-driven commodity (gold) falling, is a favorable indication for the general economy.

It’s probably not a bad time to accumulate oil, which most experts say can’t be sustained long-term in the current price range. That is because it needs to be higher to cover finding and lifting costs for reserve replacement. Oil royalty trusts are the most direct option (e.g. BPT and COSWF.PK) through ownership of the physical commodity. Futures related funds (e.g. USO) provide direct price participation, subject to peculiarities of the futures market, such as “contango” and “backwardation“. Less direct price correlations come with oil producing companies, exploration companies, and integrated oils.

Our past research shows coal to be highly correlated with oil, so that coal companies can provide a reasonable indirect participation in oil recovery.

Direct copper participation, as a practical matter, is through futures, or a futures based ETN. However, ETNs have bank counter-party risk that is not attractive these days, and the copper ETN from Barclays doesn’t have enough volume to be attractive. The copper miners give indirect exposure, plus operational and geopolitical risks. Southern Copper (PCU) or Freeport-McMoran (FCX) are examples, but the changes in their share prices do not closely correspond to copper price changes, because of many other impacting issues.

Gold had taken on a quasi-currency role lately that, for the moment, is not working for long positions. It is down substantially, just recently. That is consistent with the industrial commodities rising. Gold futures and the gold ETF (GLD) are key ways to participate directly in gold through securities. Coins are not something we consider to be a good choice.

If the inversion of the relative price movements is sustainable, then selling gold and buying oil would be profitable. Perhaps it’s best to wait for oil to break resistance and gold to break support before making major decisions, unless you are thoroughly convinced of the fundamental price drivers and price directions.

Having some of both gold and oil in most portfolios with rebalancing makes sense. Major allocation changes back and forth between oil and gold would only be suitable for a trading portfolio.

Comments

[FMIC:]

I would love to see Freeport McMoran Copper and Gold go out of business. We need oil companies, not baby killers like Freerport McMoran Copper and Gold. Hopefully people will stop buying their stock. How can you trust a company that the owner pays himself over $70M a year while laying off thousands of people who made it possible for him to earn that much?

Mar 11 04:59 AM

[Urbane Gori...:]

FMIC .. I checked your website. Obviously you have issues with FCX. I just don't see any difference between FCX and any of the oil companies that you seem to support.

Mar 11 09:05 AM

[Rohan C. Pease:]

PCU will give you a higher reward if there is an upward movement in copper. Currently it provides a higher beta upside when looking at its correlation with copper futures. In the oil space, Petrobras (PBR) will benefit the most from the next upcycle in oil prices. Their daily output is expected to almost double over the next 5 years from approx 2.3 MM/bbl to 4.3MM/bbl per day.

Mar 11 04:01 PM

[Old Trader:]

I'd be a bit concerned about the politcal risk...granted, Brazil isn't Venezuela, but there have been rumblings heard there...


On Mar 11 04:01 PM Rohan C. Pease wrote:

> PCU will give you a higher reward if there is an upward movement
> in copper. Currently it provides a higher beta upside when looking
> at its correlation with copper futures. In the oil space, Petrobras
> (seekingalpha.com/symbo...) will benefit the most from the
> next upcycle in oil prices. Their daily output is expected to almost
> double over the next 5 years from approx 2.3 MM/bbl to 4.3MM/bbl
> per day.

Mar 12 12:37 AM