by Raul de Frutos on DECEMBER 1, 2016
Yesterday, the Organization of Petroleum Exporting Countries finalized a deal to cut production by 1.2 million barrels a day starting in January, its first reduction since 2008.
The production deal will last six months with a committee composed of three OPEC country members monitoring and reviewing the decision at their next meeting in May to determine if the cuts will extend for another six months.
Trading volume (at the bottom) surged as crude moved up on Wednesday. Source: @StockCharts.com.
On Wednesday, U.S. crude jumped 9.3% to settle at $49.44 a barrel. The number of contracts traded on Wednesday rose sharply as prices made a one-month high. Rising volumes confirm that new money is supporting the price move, increasing the likelihood that the trend will continue.
The surge in oil prices is a welcome development for metal investors. Industrial metals rose across the board following OPEC’s decision. Crude is not just a commodity, itself, but an asset closely followed by commodity investors. Rising oil prices make investors move money into commodity markets and, of course, industrial metals. In addition, crude is the main benchmark for energy prices. Higher energy prices mean higher transportation costs and higher production costs, especially for those energy-intensive metals like aluminum.
Dollar Continues to Rise: A Strange Divergence
The US dollar index rises on Wednesday despite the surge in oil prices. Source: @StockCharts.com.
The U.S. dollar and commodities generally move in opposite directions. Commodities are priced in dollars, so when the dollar appreciates against other commodities, they become more expensive for foreign buyers. In the same manner, higher commodity prices have a negative effect on the dollar as the currencies of commodity-exporting countries’ strength against the dollar goes up as commodity prices rise.
Over the past three months, this inverse correlation hasn’t worked. One explanation is that in a world of low and even negative rates, demand for dollars is getting a boost as the Federal Reserve is expected to increase interest rates, making the currency more attractive for yield-seeking investors.
The dollar and commodities can move together for some time, but eventually they will move in opposite directions. At this point, it’s still hard to tell if a continuation of the dollar’s bull market will kill the bull market in commodities or vice versa. We’ll keep a close eye on these two markets.
