Coronavirus Sickens Crude Oil and Copper
When I was a kid in the 1960s, the tuxedo-clad Dean Martin would always close his popular TV show with the phrase “keep those cards and letters coming.” I exhort you to do the same.
I enjoy getting letters (usually in the form of emails) from readers. Your questions and feedback keep me on the right track with my column and help ensure that I’m staying relevant to your investment needs.
One recurring reader question is, why do I so frequently focus on oil and gas prices? Those of you without investment exposure to the energy sector wonder why you should care.
Well, despite widely believed misconceptions, fossil fuels aren’t on their way out. Electric vehicles and renewable fuels notwithstanding, we still live in the Hydrocarbon Age.
The U.S. spends $1.4 trillion annually on energy, accounting for 8.2% of gross domestic product. In the U.S., the energy industry supports more than nine million jobs directly and indirectly, which is over 5% of the country’s total employment.
According to statistics from Goldman Sachs (NYSE: GS), the energy sector accounts for roughly one-third of S&P 500 capital expenditures and roughly 25% of combined capex and research and development spending.
Crude oil is the most valuable commodity in the world. And right now, it’s under extraordinary pressure. Natural gas prices are low and falling as well, but today I’ll focus on oil and save natural gas as a topic for another day.
Oil and copper get the flu…
As I write this, the influenza-like coronavirus is shaping up to be the biggest demand shock for crude oil since the 2008-2009 global financial crisis. Most commodities depend on demand from China, which is ground zero for the virus. Two bellwether commodities, crude oil and copper, are getting hit especially hard.
News reports surfaced Wednesday about a possible vaccine for the coronavirus, a development that’s lifting investor moods. But you shouldn’t make investment decisions based on rumors and fleeting headlines. Besides, a vaccine is not a short-term solution to this fast-moving epidemic.
Think the difficulties of oil and copper don’t affect the non-commodities holdings of your portfolio? Think again. Because of the importance of energy and copper to the overall economy, their woes threaten to spill over into other sectors. Bad news for these markets could be bad news for you.
The prices of West Texas Intermediate (WTI) and Brent North Sea crude have been plunging, as the coronavirus weighs on energy demand. U.S. benchmark WTI is now officially in a bear market, shedding 20% of its price in January. International benchmark Brent has fallen 13% since January 20, when the seriousness of the outbreak started to become apparent.
Prices of copper have slumped more than 12% since mid-January. The short-term outlook for copper continues to look negative (but as I’ll explain, the long-term prospects are extremely bright).
Copper is a widely used commodity so sensitive to economic conditions, it’s viewed as a leading indicator. Because copper is a time-proven predictor of economic trends, the red metal is said to have a PhD in Economics. Hence the metal’s nickname “Dr. Copper.” More about copper, below. First, let’s look at oil.
This week, OPEC is considering emergency production cuts to counteract the coronavirus-induced swoon in oil prices. WTI yesterday continued its descent and fell more than 1%, to close below $50 per barrel (see chart).
Oil’s price drop isn’t merely a function of investor emotionalism. Recent data point to an unexpected inventory build, amid a slowing global economy. Economic damage from the coronavirus spells further trouble for oil.
Falling energy prices bring some good news, of course. Producers in the oil patch may be suffering, but lower energy costs help consumers and many businesses. Prices at the gasoline pump are falling. But a prolonged slump in crude prices is a bearish signal, because Wall Street interprets robust oil prices as the sign of a healthy economy.
China has been reducing its March crude oil orders from Saudi Arabia. Meanwhile, Sinopec Group is cutting its refinery production this month by 600,000 barrels per day (BPD) because it projects less demand.
Beijing-based Sinopec is the world’s largest oil refining, gas and petrochemical conglomerate and as such, its actions are seen as a yardstick for not just the energy markets but also the global economy.
China’s economic growth, already at a three decade low, will slow further because of the coronavirus. The world’s biggest importer of crude oil suddenly needs a lot less of the stuff.
Chinese authorities have extended the Lunar New Year holiday in order to cope with the coronavirus, which means factories, offices and shops remain shut. Demand for jet fuel has plummeted around the world as airlines suspend flights to China and travel restrictions take effect within the country.
Citigroup (NYSE: C) analysts this week estimated that global oil demand could drop by 1 million BPD due to the virus. They predict that China’s oil demand will fall by 20% compared to typical demand this time of year.
Calling Dr. Copper…
It’s not just oil. Citigroup slashed its price forecasts for other commodities, notably copper, as the coronavirus dampens trade and economic activity.
But here’s a safe bet: Over the long haul, demand for crude oil and copper should pick up again and provide a sustainable tailwind for the prices of these commodities, especially in emerging markets with rising middle classes.
According to the Boston Consulting Group, China and India will be home to about one billion middle-class consumers by the end of 2020. Emerging markets also have populations that are younger, and hence freer spending, than those in developed countries. As their living standards rise, these newly affluent people will consume more energy and more of the products that can’t exist without copper.
History shows that virus outbreaks only exert short-term damage. The decline in demand for oil, copper and other commodities should prove temporary.
Consider the situation with copper. The experts at Investing Daily predict that the price of copper will soar in 2020 and beyond. And that’s great news for the best-situated copper producers.
Copper is a crucial commodity. The industrial world can’t function without the red metal. The practical uses of copper are all around you. Copper is vital for building construction, power generation and transmission, electronics, industrial machinery, and transportation vehicles. Copper wiring and plumbing are mainstays of heating and cooling systems, appliances, and telecommunications links.
As the world economy grows, so will demand for copper. My colleague Dr. Stephen Leeb, our in-house specialist on commodities, predicts that global copper consumption will reach 1 billion tons over the next 20 years. That averages out to 50 million tons a year, more than twice the current rate.
However, the world currently is running on a mere 10-day supply of copper reserves, scattered in storage depots around the world. When the supply of a commodity we need is shrinking, and demand is exploding, prices are primed to soar.
The coronavirus panic will inevitably subside. When it does, crude oil and copper prices will likely embark on an upward trajectory. Our experts are particularly keen on the investment opportunities right now in copper. For our favorite copper play, click here now.
And keep those cards and letters coming! You can reach me at: firstname.lastname@example.org
John Persinos is the editorial director of Investing Daily. He also serves as the managing editor of our flagship publication, Personal Finance.