• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Basic Materials

Oil and Trade Wars: Has the Shoe Fallen?

Trade wars have the potential to ignite a collapse in raw material demand; was yesterday the start of a larger unwind?
By MALEEHA BENGALI
Aug 16, 2018 | 06:08 AM EDT

Brent oil futures are down 8% from their highs in July, whereas copper, lead, zinc front-month futures are down 20% over the same time. Yesterday, Brent oil joined the commodity rout and fell 3.5%. So what was the catalyst? A few things, really. But usual press will highlight geopolitical headlines and whatever sounds right to justify the move.

Going back to asking ourselves why base metals and commodities have been weak since the start of June, the answer lies in the potential for trade wars to ignite a slowdown in global economic growth (GDP) and subsequent pre-emptive collapse in raw material demand. That's how commodities trade. They are a blend of real demand plus perception of demand going forward. The supply side is easy to outline, it is the demand that moves the needle on the pricing. That is where it gets interesting.

The wheels have been set in motion for oil for some time. But everyone was too fixated on Iran sanctions and potential loss of 1 million bpd, when they forgot that OPEC plus non OPEC had closer to 2 million bpd already that they could pump if need be. It is what they cut back in 2016.

  • The iShares China Large-Cap ETF Is Bearish and Has Further to Fall
  • A Country 'Built on Tariffs': Is Economic Warfare the New Normal?

We have seen the June and July production numbers from Saudi Arabia and Russia, and they are ramping up already. They did so even before the actual meeting held in Vienna. So if you have the balance of increasing supply and demand softening, given what is happening in emerging markets and economies printing softer macro numbers, it is inevitable that distillate (a barometer of global demand and GDP) demand falls as well.

The reason why oil is taking its time to fall is because we are in a gasoline summer driving season. It ends officially by labour day in September. We are close to it now. Demand numbers have been flat-to-softer, and refineries have cranked out as much gasoline as they possibly can to meet demand. Hence demand for crude has been strong (crude is used to make gasoline). Now post-September, the baton gets passed to distillate demand as winter heating season starts.

If you notice the DOE inventory data in the last few weeks, distillate demand has been softening or staying above 4 million bpd. Not growing. As refineries produced gasoline, they were boosting distillate production as well, as we were at record-low inventories earlier this year. This situation has now been resolved as production hit a seasonal record 5.34 million bpd. Distillate stocks are rising faster than the seasonal norm! This is a worrying development at a time when demand is supposed to be getting softer.

Brent physical market spreads have been showing weakness for some time. It just takes time to filter into actual spot price. Brent's six-month calendar spread remains in contango, and the move in the spread since late April has been the largest softening since oil prices slumped in late 2014. #mindthegap.

Added to that are macro hedge funds selling all assets linked to global economic growth and softness (a result of margin calls and liquidation in one part of the portfolio causing a reaction in other parts of the portfolio to contain risk). To top it off, DOE data yesterday showed a surprise crude build of +6.8 million bbl. Crude stocks are rising faster than seasonal norm. Add up all these developments and one can see oil prices back to $60-70/bbl. Hmmm, a healthy price for Trump and his domestic agenda? But also a neutral-to-positive price to boost production for OPEC and Russia. Win-win for all.

If one were to really look at fundamentals, copper has a deficit of 200,000-500,000 tonnes this year. The supply side is not getting easier, with ore grades lower. Sure, the market is worried about demand collapse in China. No doubt. But then the demand for oil in the rest of Asia should suffer too. And fundamentals for oil are actually looking bleak, with looser inventory balances. Perhaps yesterday was the start of a larger unwind?

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Commodities | Markets | Basic Materials | Investing | Energy

More from Basic Materials

4 More Unloved Stocks Going Into My Latest Tax-Loss Selling Portfolio

Jonathan Heller
Dec 6, 2019 11:00 AM EST

We'll track a dozen beaten-up stocks that could be subject to tax-loss selling at the end of 2019 to see whether they can stage comebacks in 2020.

PPG Industries Can Rally Further Into 2020

Bruce Kamich
Dec 4, 2019 8:20 AM EST

PPG is looking forward to more electric vehicles, because EVs require two to four times as many coatings and adhesives as traditional vehicles.

It's Time to Start Looking at Dr. Copper

Maleeha Bengali
Nov 15, 2019 6:48 AM EST

Given what we know about global backdrop and what central banks are doing, the risk-reward looks very attractive in playing the long side of Copper.

Two Cyclical Names That Have Strong Looking Charts

Bruce Kamich
Oct 29, 2019 9:12 AM EDT

Let's visit with the charts of PPG and Caterpillar.

Opportunity Is Bottled Up in This Stock, So Be Ready When it Pops

Paul Price
Oct 22, 2019 7:00 AM EDT

Glass-container maker Owens-Illinois is a speculative play that could prove spectacular.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:06 PM EST CAROLYN BORODEN

    MRK and LVS Targets Coming Up

    View Chart » View in New Window »  LVS View C...
  • 12:01 PM EST BOB LANG

    Rolling up Apple

    just the other day we added some apple calls on th...
  • 12:24 PM EST GARY BERMAN

    Fibocall: The SPX-Cash Long-Term View

    You will hear from many analysts on TV screaming t...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2019 TheStreet, Inc., 14 Wall Street, 15th Fl, NY, NY 10005

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login