Copper Climbs After WBMS Reports Growing Supply Deficit

Includes: COPX, CU, FCX
by: Proactive Investor

The commodity markets are seeing some narrowly mixed trade today, with some weakness in the dollar generally offering support, but with most markets moving in a sideways direction. The Chinese Industrial and GDP data overnight showed nothing unexpected, although if anything this itself cast a small shadow over the markets with expectations of perhaps somewhat higher numbers, given the countries interest rate hike earlier in the week.

Copper is somewhat of an exception to the lacklustre moves however, making decent gains in the session after the World Bureau of Metal Statistics (WBMS) once again shed light on the growing supply deficit in the sector.

The WBMS said that for the first eight months of this year, their was a supply deficit in the copper market of 161,000 tonnes, compared with last year’s 16,000 tonne oversupply for the first eight months of 2009.

This growing oversupply is indicative of the major issue facing the copper market; ever growing demand for the metal as the global economy recovers, and increasing demand from China and India, is failing to be met as no new major copper production or mines are coming on line. This situation looks set to continue probably into the longer term, and suggests the very fundamental premise that copper prices will continue to climb while supply fails to meet demand. Zinc and lead on the other hand are seeing no such problems, with the WBMS reporting that the oversupply in zinc particularly is very significant; around five times higher than it was in 2009 at 253,000 tonnes.

Crude oil is trading near flat today, although did manage to pare back some of the week’s losses in floor trade yesterday, following on from a ‘not as bad as expected’ US Department of Energy (DoE) weekly inventory report.

The data, released by the Energy Information Administration (EIA) yesterday, showed crude stocks building by a lower than expected 0.7 millions barrels (mbls). While imports did increase in the week, by 0.5mbls, a 50 basis point (bps) increase in refinery run rates helped to cap any build in stocks. This increase did filter through to gasoline stocks, which rose by 1.2mbls, although middle distillates actually saw a 2.2mbls decrease. This came particularly from a significant draw on diesel stocks in the week, while an increasingly cold climate also brought about a relatively large draw in heating oil stocks.

Going back to crude itself, the report showed stocks at Cushing, Oklahoma, fell by 1mbls in the week to just 34mbls. Cushing is the key delivery hub for West Texas Intermediate (WTI) light sweet crude for the Nymex exchange in the US, with inventory at the hub often effecting the price action of those futures for near-term delivery particularly.

While the headline figure impacts the entire crude curve as a whole, the need for physical delivery in the short term means the Cushing number often pushes price action in the front WTI Nymex contract; another reason why crude prices were able to make gains despite a net increase in the overall inventory number.

Precious metals prices are underperforming today, despite some mild strengthening in the greenback, with gold, silver and palladium, all relatively rangebound for the moment. There is potential for further price squeezes however, with the ongoing ‘currency war’ between the US and China the main topic of debate for the G20 when they meet in Korea over the next few days. Assuming the more likely scenario of nothing getting settled between the two nations, the ongoing currency depreciation race is set to buoy the precious complex in coming weeks.

Focusing on gold, there is still some ongoing pressure coming from the fund arena in recent sessions, with PSDR Gold Shares reporting yesterday their fourth consecutive net liquidation of an additional one tonne; a combined 5 tonne sell-off in as many days, and bringing their total holding back below the 1,300 tonne figure once again.

From a technical standpoint, spot gold shows signs that some further gains may be made in coming sessions, after prices bounced from the 21-day moving average around $1,332/oz yesterday, and as 10-day momentum pushed back into upward territory. Although a sell signal was triggered in the daily stochastics this week, a break and close below the 21-DMA (today at $1,335/oz) would be needed to signal coming weakness, while any upward moves could be expected to take pause ahead of the all-time high near $1,387/oz.

Disclosure: No position