Commodities Weekly: Who’s Right -- Copper or Crude?

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Energy is the clear leader in the commodity markets right now. Our equally-weighted energy index is up 13.76% over the trailing month and 6.58% in the last five days.

The emerging strength from this group is supported by a rising rate environment that could be just getting started.

So, crude oil to 100 dollars and natural gas to 9?

Maybe! But before we get ahead of ourselves, there are still plenty of mixed signals and divergences that need to be resolved.

One that stands out is the lack of confirming price action between economically sensitive commodities. Let’s take a look!

Here’s a chart of Crude Oil futures, Copper futures, and Copper Miners $COPX:

All three are consolidating within an underlying uptrend. But there’s one major difference.

Crude oil is retesting the upper bounds of its recent range and looks poised to break out. Meanwhile, copper and copper miners are testing year-to-date lows, and are on the brink of breaking down. 

We think it’s a lot more likely that one of these commodities catches up or down to the other rather than them breaking in opposite directions. 

But stranger things have happened.  For now, the weakness in Copper futures and COPX is not supportive of the recent action in crude oil as it approaches an area of former resistance.

This rotation into energy is healthy. But damage to the ongoing uptrend in base metals would not be. 

It’s hard to imagine a world where crude oil is ripping higher while Dr. Copper is rolling over to the downside. Base metals breaking down doesn’t jibe with an environment characterized by global growth and reflation.

To be clear, copper and COPX don’t have to rip higher along with crude oil. They just can’t lose their respective support levels.

That’s why we’re keeping a close eye on the 4.00 area in copper and 32.75 level in COPX.  

We have to view the recent strength in energy with caution if we’re below those levels. 

But at the same time, we don’t want to overthink it too much. With so many mixed signals out there these days, we can only trade what’s in front of us. 

And if this year has taught us anything...messy for longer is always a possibility.

What do you think? Shoot us a note and let us know.

Thanks for reading, and be sure to download our Commodity Report below!