Chart Of The Week - Heavy Metal Omen For Energy Prices

Jun. 28, 2022 9:38 PM ETJO, DBC, GSG, DJP, GSP, GSC, GCC, RJI, BCM, BCI, BCD, COM, USCI, FTGC, COMT, PDBC, UCI, UCIB, FAAR, COMB, SDCI, CMDY, DJCB, JJS, CCRV, DJCI3 Comments9 Likes
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Summary

  • Industrial metals have come under pressure with global recession prospects increasing.
  • The divergence between metals and energy prices indicates further downside to come for energy.
  • Key headwinds for the global economy have been realized through declining demand for metals, now energy demand looks at risk also.

Oil Or Gas Transportation With Blue Gas Or Pipe Line Valves On Soil And Sunrise Background

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Energy Prices vs Metal Prices: Energy commodity prices (the index in this chart includes crude oil, natural gas, and other petroleum products) have pulled back from the highs, but it could just be the start of a deeper correction if the price action in industrial metal commodities is anything to go by.

Industrial metals have come under intense pressure since peaking earlier this year as a global recession looks increasingly likely, with multiple leading indicators pointing to a downturn, and even more recent data showing clear softening already.

I’ve previously highlighted the dearth of investment in supply by energy producers, and this may well stop the gap in this chart from closing entirely. Not to mention the fact that investment in renewables and alternative energy still lags far behind the grand ambitions of moving to a post-carbon economy. Likewise, geopolitical tensions continue to simmer across key energy producing hot spots.

In other words, it’s not a done deal as such, and not all chart gaps like this are made to be closed in the way that you most expect. But I think the key point to emphasize is that there are clear and pressing headwinds besetting the global economy right now, and while supply is a critical part of the equation, we can’t talk price without talking demand (it’s just plain old ECON101).

So while we can overlay our own biases and beliefs and stories onto this chart, the key point is that the demand side of the commodities-equation is clearly coming under pressure. The keenly economic-sensitive industrial metals are telling us this loud and clear. The key risk or implication being energy is the next shoe to drop.

chart of energy commodity prices vs industrial metals

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Key Point: Energy commodity prices are at risk in the event of a global recession.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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