The oil market and the base metals market are currently on two different trajectories. Let’s explore the factors driving these diverging supply trends and their potential impact on prices.

Brent Oil’s Impressive Rally

Brent Oil has been on an impressive rally, recently crossing the $95 per barrel mark. This marks the fourth consecutive week of gains. The primary driver behind this surge is a combined production cut of 1.3 million barrels per day by Saudi Arabia and Russia, which is expected to last until the end of 2023.

Surplus Base Metals

In contrast to the oil market, all base metals are expected to be in surplus in the next quarter. Several factors contribute to this surplus, including:

Seasonal Patterns: Industrial demand tends to slow in the northern hemisphere.
Cyclical Trends: Metals demand is decelerating worldwide.
Chinese Production: China typically reaches record monthly output in Q4 to meet yearly targets.
Monetary Factors: Traders aim to reduce inventories for better year-end financials.

Market Scenario

Copper’s Stockpile Challenge: Copper is facing challenges as its stockpiles near 150,000 metric tons at the LME (London Metal Exchange). The combination of off-season demand and increasing Chinese output is likely to lead to more inventories in LME and SHFE (Shanghai Futures Exchange) warehouses. Some estimates suggest that LME stocks could reach 250,000 metric tons by the end of the next quarter, matching 2021 levels. While copper is currently above its short-term support at $8,200, ongoing inventory arrivals could put the metal at risk of a drop to the $7,000-$7,500 range.
Aluminium’s Waiting Game: Large aluminium inflows into LME warehouses have not materialized so far. The fear of significant warranting has kept aluminium prices below the $2,240-$2,250 resistance level. An acute slowdown in end demand in Europe can lead to delays in shipments, impacting spot premiums. Goldman Sachs expects the recession in Germany to persist due to various factors, further affecting aluminium demand.
Nickel’s Surplus Challenge: Nickel inventories in LME warehouses have increased by 10% in the last month. This trend may continue into 2024 as the surplus is expected to persist. The registration of several Chinese brands in recent months has contributed to this surplus. Nickel recently tested its previous low at $19,700 and could potentially decline further to $18,000-$18,500 if inflows continue.
Zinc: The Warehousing Game: Zinc has seen requests for the withdrawal of metal over the past month, despite plentiful off-exchange inventories. This alternating pattern of withdrawal requests and inflows is attributed to warehousing games. However, today’s re-warranting of 5,700 metric tons suggests the end of this game. Prices dipped below $2,500, and if historical patterns repeat, further inventory inflows could push prices lower, with potential targets at $2,300-$2,350.

OFB’s Insight

The current market conditions for crude oil and base metals paint a divergent picture. Crude oil is experiencing a significant rally due to production cuts by Saudi Arabia and Russia, leading to potential deficits. In contrast, base metals are in surplus, influenced by seasonal, cyclical, Chinese, and monetary factors. Copper faces challenges with rising stockpiles, while Nickel’s surplus may persist. Zinc’s warehousing game appears to be ending, potentially affecting prices.