Reflecting improved global growth, crude oil prices have increased strongly since the summer. In the paragraphs below, BCA Research argues further gains are to be expected.
We have highlighted for some while that a rotation strategy throughout the commodity complex was likely, based on macroeconomic conditions: ‘First gold, then copper, and finally oil.’ Gold typically benefits most from aggressively anti-deflationary liquidity impulses, especially from the U.S., which bring down real interest rates and the dollar. That backdrop may be fading for now.
Copper benefits when China is booming and/or restocking. We expect the latter, with demand exacerbated over the short-term by the launch of two ETFs (one each for copper and nickel). However, copper prices have surged since breaking above the psychological $4/pound ($8000/tonne) level and may need to consolidate recent gains.
Finally, oil outperforms when the growth impulse broadens to the U.S. This is what appears to be currently underway: Recent economic releases suggest that the recovery is becoming more sustainable. Moreover, physical demand is starting to draw down inventories, even though several OPEC countries have been producing well above quota.
BCA Research concludes that oil and related product prices are well positioned to benefit as firmer economic growth boosts physical demand for petroleum.
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Source:BCA Research, December 16, 2010.
As an aside, while Brazil, India and China have been underperforming the U.S. stock market for almost three months, the remaining BRIC member, Russia, has been holding its own, trading solidly above its key moving averages (see price and relative charts below). The strong prices of major Russian exports products such as oil and wheat are undoubtedly helping the Russian Trading System Index and the related Market Vectors Russia ETF (RSX). Although this instrument is probably a bit toppish in the short term, it is one to put on the radar screen, especially once a downward reaction takes place.
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Source: StockCharts: com