Crude oil prices have been outperforming copper and other commodities in more than a decade, fueled by bets on limited production.
According to Dow Jones market data, oil is now on track to outpace copper by the largest amount this year since 2002 and has topped the crude inventories index by the biggest margin in more than a decade. Like oil, natural gas is also outpacing other commodities.
Copper prices are down nearly 10% from May’s record, while rallies in some other materials such as zinc and lead have largely halted.
Fears of a slowdown in growth in China, the world’s largest commodity consumer and biggest oil importer, weighed on some industrial metals. Traders say the economic fallout from the impending collapse of debt-ridden property developer China Evergrande Group could exacerbate the recession caused by the delta version of the coronavirus. This is because the Chinese economy is heavily dependent on real estate developers for growth and jobs.
Crude’s steady rise in the face of those growth concerns suggests that many traders expect weaker supply to drive down prices, raising fuel costs for consumers and businesses. Energy supply constraints have been slowing factory activity around the world and contributing to accelerating recent inflation. Rising consumer prices and concerns about climbing government bond yields have fueled volatility in US stocks in recent weeks.
Even though fewer consumers travel and consume fuel, many analysts predict that reducing investment in new supplies by energy companies will drive oil prices up. Investors are pressing companies, including Pioneer Natural Resources Co..
and Occidental Petroleum Corp..
, to limit expenses and environmental damage while returning money to shareholders.
Now, some are betting that a worldwide shortage of natural gas and other fuels needed to power homes and businesses will spill over into the oil market. With electricity prices rising in Europe, US natural-gas futures hit a nearly 13-year high of $6.31 per million British thermal units on October 5, bringing their advance for the year to nearly 150%. Despite the recent retreat, prices could rise even higher if colder temperatures pick up demand in the coming months.
Some analysts say that high natural gas prices and declining inventories could prompt some power plants to use oil as an alternative to natural gas for electricity generation. This will boost demand for crude at the same time, adding momentum to investors betting that environmental pressure will offset long-term shortages.
“There’s a lot in itself right now,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. It has continued to support shares of energy infrastructure companies that store and move energy products. “We don’t know what the weather is going to bring… the worst-case scenario is very ugly.”
Some analysts said investors who have avoided the energy sector for long due to poor returns and environmental fears are playing catch-up and increasing their exposure to one of the year’s best-performing trades. Huh.
The S&P 500 energy sector has been the best-performing group of the broader index this year, gaining nearly 50%. Pioneer, Occidental and Diamondback Energy Inc. Rebound in shares of companies like.
while industry giant Exxon Mobil Corp..
and Chevron Corp..
Many stocks in this sector have outperformed but still bounced.
Brent crude, the global gauge of oil prices, closed at $82.39 a barrel on Friday. Bank of America analysts said in a recent note that Brent could reach $100 this winter if demand picks up. Analysts said further price hikes could add pressure to the economy and complicate the Federal Reserve’s plans to gradually raise interest rates from next year.
“It’s the confluence of higher-than-normal oil prices along with other constraints in the economy that makes for something to watch,” said Nella Richardson, chief economist at human-resources software firm Automatic Data Processing Inc. Fed in an uncomfortable position.”
Price moves are attracting the attention of other policymakers around the world. Russian President Vladimir Putin said last week that Moscow could help quell the natural gas crisis by increasing its supply of electricity-generating fuel to Europe, which could lower prices.
Meanwhile, US Energy Secretary Jennifer Granholm told a recent Financial Times conference that the US is considering releasing oil from the Strategic Petroleum Reserve. President Joe Biden earlier this year urged the Organization of the Petroleum Exporting Countries to ramp up oil production more quickly to ease any supply bottlenecks.
Oil prices are also in focus as their recent progress comes weeks ahead of the global climate summit in Glasgow, Scotland. Many analysts say the recent volatility shows the risks of ending fossil-fuel production too quickly.
“There’s very little margin for error today when you think about energy supply and power generation,” said Stacey Morris, director of research at index provider Alerian. “It’s causing some of these problems that we’re seeing.”
Analysts said countries such as OPEC, Russia and private companies that are subject to less environmental pressure are set to exert greater influence in commodity markets. OPEC opted to stick with the recently measured supply increase, which helped power oil prices even higher.
Steps such as reserve releases could help to briefly balance energy markets, but some investors still think a long-term push by investors to reduce supply and emissions by producers will help prop up prices.
Many analysts expect supplies of copper and other metals to be limited by climate concerns, but demand concerns have hurt those commodities lately. According to Jefferies, the Chinese property sector accounts for about 10% of global copper demand, so some traders now believe the metals markets will be adequately supplied.
Not so with oil, several investors said.
“There’s a scarcity mentality out there,” said Noah Barrett, an energy research analyst at Janus Henderson Investors. “People are expecting a tighter market.”
Write to Amrit Ramkumar at [email protected]