Lowest Oil Prices in 3 Months Could Add Pressure to Metal Prices

• July 28, 2016

Crude oil (in black) diverges from industrial metals (in red). Source: MetalMiner analysis of @Stockcharts.com data.

Historically, crude oil prices have moved in tandem with industrial metals. Why is that?

1. Oil is  not just a commodity, itself, but an asset closely followed by commodity investors. Falling oil prices make investors move away from commodities and, of course, industrial metals.

2. Oil is the main benchmark for energy prices. Lower energy prices mean lower transportation costs and lower production costs, especially for those energy-intensive metals like aluminum.

For these reasons, it’s not strange to see that the trend in industrial metals looks very similar to that of oil prices (see chart above). But since June, we are witnessing a divergence between these two trends. Oil prices have fallen while industrial metals continue to rally, for the most part.

Just when it appeared crude oil’s oversupply was easing, a new glut of gasoline is drowning the market’s hopes for a recovery, sending crude prices sliding.

So far, oil’s price correction looks normal within this year’s bull market. It’s not strange to see profit taking following the strong rally earlier this year. However, now that prices are hovering near $40 per barrel, they should start finding support. This divergence likely won’t last too long and if oil prices continue to fall that weakness could spread out

What This Means For Metal Buyers

It’s normal to see a price correction in oil following a strong rally earlier in the year. Oil prices should start finding support near current levels; otherwise oil’s price weakness could spread out into other commodity assets, including industrial metals.