Commodities Sizzled, Then Fizzled. What’s Next. 

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While prices of oil and copper rallied for a hot second last month, those gains have fizzled out. The next meaningful moves could come soon, with significant consequences for producers’ stocks, as several macroeconomic developments play out. 

West Texas Intermediate crude oil, the benchmark for prices in the U.S. market, gained 8% from around $67 a barrel in early June to just over $72 by the latter half of the month. Copper rose almost 10% from $3.56 per pound in late May to $3.91 in late June.

All that lifted the

Energy Select Sector SPDR Fund

(ticker: XLE) 7% to about $82 from late May to early June, while the SPDR S&P Metals & Mining ETF (

XME

) gained 15% to about $51 from late May to early July. 

The gains came because investors believed the Federal Reserve would soon end the aggressive series of interest-rate increases it rolled out starting early last year, while the Chinese economy is recovering from the damage caused by the prolonged lockdowns Beijing imposed during the pandemic. Both changes would mean faster economic growth and more demand for commodities.

Now, the market is concerned that the conditions could become less favorable. Both commodities have flatlined since hitting those mini-peaks, with oil at around $72, while copper trades at about $3.77.

Buyers are hesitating at least partly because of concern that the Fed may have to raise rates more than expected earlier. Labor demand, while slowing down, is still growing, with the potential to lift wages. At the same time, the increases in rates rolled out already are still working their way through the economy because tighter monetary policy usually achieves its full effect with a delay. Plus, demand in China has yet to come back all the way. 

For oil, “The fundamentals are tipped in favor of the bears as the onset of a recession would quickly see the resilience in consumer demand dissipate,” wrote Sevens Report’s Tom Essaye. The same is true for copper. 

At this point, the market is awaiting macroeconomic developments. One point to watch is the success of efforts by the Chinese government to boost growth. While Beijing has already lowered interest rates, and The Wall Street Journal reported last month that officials are considering issuing roughly one trillion yuan, equivalent to about $140 billion, of debt to help indebted local governments and boost confidence among businesses.

Another focal point is the Fed. Next week, inflation data for June hits the wires and investors are watching to see whether the annual increase in the consumer price index comes in at less than 4%, the result for May. Slowing inflation would give the Fed less reason to lift rates, which would in turn support demand and the price of cyclical commodities. 

For oil specifically, decisions from the Organization of the Petroleum Exporting Countries are also key. Prices in the futures market reflect concerns about demand, although the physical market appears to be more or less balanced. Producers would benefit it OPEC cuts production to send prices higher.

Definitive news on any of these fronts could move the commodities and the stocks rather decisively in one direction or the other. Moves in prices could signal where things are headed.

For oil, the mid-60s per barrel area is key. If the price holds there, it means buyers are coming in, which could mean oil could head into an uptrend, helping boost oil stocks. The key level that copper needs to hold steady at is the low $3.60s, which would make the metal and shares of miners look attractive. 

Copper stocks could rise faster than energy shares, benefiting holders in companies such as

Freeport-McMoRan

(FCX), because oil stocks already have made a much bigger rebound from the lows reached during the pandemic.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com