Copper and Crude crusade in commodity space for bear rout

The correlation of Crude oil and Copper price moves was in linear curve from long ago but in the recent times this relation is diverged, as the supply-side support that has emerged for oil has not been replicated in the metals market.

Ever since their peak in mid-March, commodities prices have resumed their bearish moves around 5% in aggregate as measured by the broad-based Bloomberg commodity index.

Crude prices have now stuck at around $40-42 range per barrel in both WTI and Brent futures, eyeing on an oil-producers meeting to discuss an output freeze at January's levels. Major producers from the Middle East and Russia will attend the April 17 summit, although tensions remain after Iran and Libya expressed their non-committal stance. 

This is well illustrated by recent movements in oil and copper prices which, after tracking each other quite closely during the initial recovery, have drifted and spaced out in the last couple of weeks with LME copper prices cracking almost 9% since their peak in mid-March, a significantly greater fall compared to the Brent crude oil price which is down by around 5%.

Moreover during the past week oil prices have bounced strongly off their lows, whilst copper prices have continued to fall.

Another major area of concern for oil demand is the situation in the US. Last week, the EIA issued its latest revised monthly oil demand estimates.

These confirmed a very soft start to the year for oil demand, with consumption of the four key refined products, gasoline, distillate, jet fuel and residual fuel oil down by a combined 318k b/d with most of that weakness coming from the distillates pool although gasoline demand was also in negative territory.

To put that figure in perspective, January 2015 saw growth of 290k b/d with gasoline up a 445k b/d. Unrevised weekly data suggest that US oil demand in February and March has been flat-to-down y/y.

Finally, whilst investors have started to pare back their huge long exposure to copper, adding to the downward momentum in prices, there has been little sign yet of that happening in oil.

Combined net long LME and COMEX copper positions held by asset managers peaked in early March and are now down 20%. In contrast, the net long position in crude oil peaked a fortnight later and only 3% of it has been liquidated so far. 

All of this does not alter our base case view that crude oil prices will trade in a range from the low-$30s to the mid-$40s over the course of Q2, but it does suggest that crude oil prices have risen a little too far too fast and a significant move lower sometime early in Q2 cannot be ruled out.