06/06/2024
Plummeting Crude Oil, Diesel, and Copper Prices
Signal Economic Stress
Thursday, June 6th,2024
Some commodities can serve as barometers of economic activity, and the recent sharp declines in diesel, crude oil, and copper prices, along with signs of a demand slowdown in recent weeks, hint at a US economy that has been struggling.
“With demand waning for commodities, this could be seen as an indication of weakness, which may suggest that the economy may be weaker than we may have thought,” said Katy Kaminski, chief research strategist at alternative investment manager AlphaSimplex.
US retail prices for diesel have seen a steady fall since September, crude oil futures have dropped in 2Q24 but have held onto a year-to-date gain, and copper prices have more recently suffered a decline, following a rise to all-time highs.
Given sizable extended moves in copper, it’s not surprising that there would be some retracement in prices, said Kaminski. It’s “not out of the question that reduced demand may impact copper going forward.”
For diesel and oil prices, those are perhaps a “bit more clearly a demand story,” with oil production cuts by major oil producers known as OPEC+ offering an “indication of reduced demand,” she said.
Taking a look at the bigger picture for commodities markets, the S&P GSCI XX:SPGSCI, a benchmark for investments in the commodity markets, trades more than 4% lower in 2Q24 to date as of Wednesday intraday, but has gained over 4% year to date, FactSet data show.
The energy sector is among notable decliners in the latest quarter, with the S&P GSCI Energy index XX:SPGSEN down over 10%. In contrast, the industrial metals sector has seen impressive gains, with the S&P GSCI Industrial Metals Spot index XX:SPGSIN up more than 13% in 2Q24.
Oil and, by extension, diesel are barometers of economic health, said Ernie Miller, chief executive officer of Verde Clean Fuels. And there have been visible signs of slowing demand growth for oil and diesel, which are “indicative of an economy that is struggling with high interest rates and slow growth,” he said.
US economic growth between 4Q23 and 1Q24 slowed “dramatically.” “Slowing demand growth for oil is the result of lackluster economic conditions and post-pandemic recovery that is running out of steam,” said Miller.
Global diesel demand has been hit by a trucking slowdown since last year, as rising interest rates slow the economy, said Patrick De Haan, head of petroleum analysis at GasBuddy.
Then, a warm winter continued that weak demand picture, and now with winter behind us and a slower economy, demand has softened. But diesel itself can be a “decent gauge for the economy,” he said. Right now, that gauge is “flashing red for the economy,” said De Haan.
“There could be trouble ahead.” US diesel prices at the retail level stood at $3.819 a gallon Wednesday, their lowest since July of last year, GasBuddy data show. So far this year, they’ve fallen 4%, even as West Texas Intermediate oil prices have settled at its lowest since February.
Average US retail prices for diesel have fallen to their lowest since July 2023, GasBuddy data show. The four-week average for US distillate fuel oil supplied, was at 3.719 million bpd as of the week ended May 31st, down 3.4% from the same time a year ago, according to the EIA.
“Diesel is a better sign of economic balance and right now, given its use in commercial applications” such as trains, trucking, and construction, “very low demand is a bit concerning,” De Haan said. Even domestic gasoline demand is struggling to hit “typically easy to reach [demand] numbers,” said De Haan.
Implied demand might not crack 9 million bpd, except on the holidays that generate travel demand, he said. There’s a lot of weakness right now and with the Fed holding interest rates higher for longer, there’s “not much optimism yet, but that could change in the months ahead,” said De Haan.
He said average prices for both gasoline and diesel could drop 10 cents to 25 cents a gallon between now and July 4th so there’s likely to be “tens of thousands” of stations selling gasoline below $3 in time for July 4th.
Overall, “declines in commodity prices may mean that inflation is less of a concern, which is positive [ in terms of the economy], but they may also mean that the economy is weakening, which is a negative,” Kaminski said.
“Given the strength of the moves in commodities like copper, it may be a good time to wait and see how much of this move has been a retracement and how much of the recent moves are linked to demand weakness and thus a somewhat recessionary signal,” she said.
The same may also be true for energy prices as the recent pull back in prices may indicate reduced demand, Kaminskisaid. “If these early indications of weakness are truly a sustained sign of economic weakness, there may be opportunities to short these commodities and/or wait for them to bottom out and find an entry point should a recession-like environment be a reality,” she said.
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Have a fantastic day!
SQ
