Crude Oil's Big Rebound Boosts Other Commodities

 | Oct 11, 2011 | 11:30 AM EDT
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Crude oil futures prices, which lead the raw-commodity sector, have done an about-face on the upside the past few trading sessions. Last week, November Nymex crude oil prices scored a fresh 16-month low of $74.95 a barrel amid the gloom of the European Union debt crisis and flagging world economies. As soon as prognosticators were saying crude prices were heading to $70.00 or below, the market made a dramatic turnaround. On Monday, November crude oil futures scored a fresh three-week high of $86.09 a barrel. Indeed, in just four trading sessions, crude futures prices rebounded by around 15%, or $11 a barrel.

Crude oil's big rebound was precipitated by the U.S. dollar index backing down from its multi-month high and by an apparent stabilization on the European Union sovereign debt crisis front. The weaker greenback prompted traders and investors to once again seek out crude and other raw-commodity markets as a hedge against further declines in the U.S. currency. Since most of the major world commodities are priced in U.S. dollars, any depreciation in the dollar on the foreign-exchange market makes the purchase of commodities with other world currencies more attractive.

It now appears the worst of the European Union's sovereign debt and financial crisis has passed. This has allowed the U.S. and European stock markets to rebound, and that in turn has also given an upside boost to major commodity markets, due to notions of better worldwide demand for commodities. While there will likely be more speed bumps for the marketplace coming out of the European Union in the coming weeks, it now appears the worst of the situation is behind us or at least factored into present market price structures. This scenario is a bullish factor for the crude oil market.

Other major raw-commodity markets have responded in bullish fashion to the surprising surge in crude oil prices the past few days. Grain futures prices have rebounded from their lows. This suggests that seasonal harvest lows are in place and that prices can trade sideways to higher in the coming weeks. Copper prices have seen a moderate recovery from last week's 14-month low. Veteran stock market watchers know that copper can be a leading indicator of trending price moves in the U.S. stock indices.

Meantime, the precious metals, gold and silver, have seen their prices bounce well up from their September spike lows; this also suggests that market lows were posted in September.

Two key factors could derail the price recoveries in the major raw-commodity markets: further appreciation in the value of the U.S. dollar index, and another meltdown in the U.S. stock market. While the path of the U.S. dollar in the coming weeks remains more uncertain, it is more likely that the U.S. stock indices can continue to trend sideways to higher in the coming weeks, and that means most raw-commodity futures markets would do the same. History does show the U.S. stock indices making market lows in the October time frame and then heading sideways to higher into the end of the year.

Given that the recent strong rebound in the U.S. dollar against the other major world currencies has been driven by "safe haven" worldwide investor demand for U.S. Treasuries, any sustained rebound in the U.S. stock market would mean improved investor risk appetite worldwide, which would then be U.S. dollar-bearish.



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