The big meeting is due in December, the eyes of the world will be upon the assembled dignitaries, will they be able to reach an agreement and what impact will that have on the world? Are we talking about the 2015 United Nations COP 21 Climate Change Conference in Paris?

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No, we are talking about OPEC’s summit in Vienna on December 4. In the short- to medium-term the price of oil will have a bigger impact on the citizens of the world than anything agreed to in Paris. OPEC is facing a revolt the likes of which has not been seen since the 1970’s. Many members, indeed most members are at a breaking point and Saudi Arabia has been accused of running the cartel for its own ends against the wishes of the majority.

The club is coming apart at the seems. Algeria’s former energy minister, Nordine Aït-Laoussine, is quoted in the Telegraph as saying the time has come to consider suspending his country’s OPEC membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. “Why remain in an organization that no longer serves any purpose?” he is quoted as saying.

The International Energy Agency (IEA) estimates that the oil price crash has cut OPEC revenues from $1 trillion a year to $550 billion, setting off a fiscal crisis that has far-reaching consequences, particularly in the Middle East already riven with sectarian unrest and four civil wars.

The widely accepted aim of Saud Arabia, and a small band of Gulf partners, is to drive US shale producers to the wall and thereby choke off the threat to OPEC’s dominance. If that is the case the battle is proving much harder than was probably anticipated. So far US output has only dropped by 500,000 barrels per day but still stands at 9.1 million b/d, much as it did this time last year. True, there is only so long hedging can keep some producers in business or technology can reduce costs, but the US Energy Department expects a loss of only 600,000 b/d next year, far from a collapse and by then OPEC will have foregone another half trillion dollars.

As the Telegraph points out, the infrastructure and technology in the US remain in place even if some shale producers go to the wall. If oil price move back up to $60+ new firms will come into the market and production will rise again. The US shale industry has become the new swing producer whether Saudi Arabia likes it or not.

Another less well debated target could be to check solar and wind power the paper suggests, both of which are terribly price dependent. The oil price does not directly impact electricity prices but certainly has an indirect effect by its impact on natural gas prices often linked to the oil price and hence natural gas or LNG’s ability to compete with renewables. But the move to renewable is inexorable, driven in some quarters by politicians desire to “do the right thing” and in others, such as China, by the knowledge that more of the same would result in such a widespread health risk that civil unrest could be the end result.

Source: Telegraph

Which brings us back to Paris, the two summits are not unrelated.

Attempts to limit carbon emission have already reduced oil demand. OPEC forecasts that oil demand will keep rising relentlessly, adding 21 million barrels of oil per day (b/d) to 111 million by 2040 as if nothing will change.

Yet, car producers the world over are not pouring billions into electric vehicles to be trendy, they know the internal combustion engine is, in the long term, a dead end. Paris will hasten that trend and as if in recognition the IEA says oil demand will be just 103 million b/d in 2040 even under modest carbon curbs. It would collapse to 83.4 million b/d if global leaders really grasp the nettle. Rather than try to drive other supply sources out of business, the Saudi’s would be better off maximizing their returns for as long as they can, it is after all a finite resource, both in terms of supply and in terms of demand.

Source: Telegraph

Source: Telegraph

The crunch though may be none of the above but the gradually collapsing geo-political state of the Middle East, as governments struggle to maintain budgets in the face of the oil-related revenue collapse.

Most petro economies have become used to huge government largesse, austerity in the form of salary reductions, a break on new hiring, reductions in subsidies or welfare payments could result in unrest in an area not noted for its calm debate in recent years.

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Unhappy populations right across the Middle East are more likely to turn to extremism if there are no jobs or prospects. As the paper points out Saudi Arabia, itsel,f has suffered five Isil-linked terrorist acts on it’s soil since May, several of them targeted at oil installations, probably as the terrorist organization also has an eye on raising the oil price. Isil is largely funded by oil revenues and no doubt is also facing a drop in income as a result of Saudi Arabia’s stance. Saudi Arabia is playing a high stakes game, a game that if I were the halftime coach I’d be instructing the team requires a change of tactics in the second half.

The fallout from the Paris attacks was felt in markets this morning as both gold and oil jumped in early trading. There’s still little good news to report for copper, which saw a major producer slash its premium for delivery to China.

Gold, Oil Up in Early Trading

Gold and oil edged up in nervous trading this morning following the deadly attacks on Paris and large-scale French airstrikes in Syria, although broader commodities markets remain weak on poor fundamentals, Reuters reported.

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Gold, typically seen as a safe haven in times of heightened risk, jumped about 1% as Asian shares and US stock futures fell but later fell. The euro skidded to a 6-1/2 month low. Oil prices edged higher, but copper slipped to a six-year low.

Codelco Cuts Chinese Copper Premium

Chile’s Codelco, the world’s top copper producer, has slashed its 2016 premium to China for the refined metal by more than a quarter to a three-year low, traders said on Monday, the latest sign of weakening demand from the market’s biggest buyer.

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In a move that will deepen concerns about waning consumption as growth in the world’s second-largest economy slows, Chile’s state-owned miner, Codelco, offered a premium of $98 per metric ton for 2016 term shipments, down from $133 per mt this year.

President Barack Obama today rejected the proposed Keystone XL pipeline, ending the political fight over the Canada-to-Texas project that has gone on for much of his presidency.

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Secretary of State John Kerry concluded the controversial project is not in the country’s national security interest, and Obama announced from the White House that he agreed.

Pipeline in California's Mojave desert.

The Keystone XL pipeline was rejected by the Obama administration this morning.

“America is now a global leader when it comes to taking serious action to fight climate change, and frankly approving this project would have undercut that leadership,” Obama said. Read more

Glencore assured investors it is reducing its debt pile this week and President Obama rejected a request to suspend review of the proposed Keystone XL pipeline.

Glencore Says Debt Payoffs On Track

Glencore said on Wednesday it was on track to reduce its debt and boost liquidity thanks to asset sales, and plans to deepen copper output cuts to help lift prices.

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Swiss-based Glencore has pledged to cut its net debt to $20 billion from $30 billion by the end of 2016 to regain the trust of investors after its shares tumbled to record lows this year.

Obama Still Wants to Rule on Keystone XL

President Barack Obama wants to rule on the long-pending Keystone XL oil pipeline by the end of his presidency, the White House said on Tuesday, calling a request by the project’s Canadian developer, TransCanada, to delay a review while it works out route details with Nebraska officials “unusual.”

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A recent Financial Times article made an interesting comparison between our current fall in commodity prices and falls following previous price peaks.

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The FT says that after commodity prices peaked in 1997, it took 21 months to arrest that fall. In 2000-01 it was 13 months. After collapsing, along with the global economy in 2008, commodities hit the floor in just eight months.

Source: Financial Times

Source: Financial Times

This time, the Bloomberg Commodity Index has been in decline for four years and counting. From its most recent peak in May 2011, the benchmark is off by half and scraping the lowest levels of the 21st Century.

Picking Market Bottoms

When will it hit bottom and what will that look like? This graph is what a recent Economist Intelligence Unit report suggests the trend may look like. Yet, you have to ask, in a world expecting the imminent rise in Federal Reserve interest rates, with high levels of corporate and state debt and variable levels of growth around the world are we really going to move from a state of volatility to a situation of slow benign gradual price movements for the next 2-3 years?

Source EIU

Source: Economist Intelligence Unit

The FT article and the EIU report tend to look at the issue from the asset class point of view, suggesting recent cuts in output by major producers, such as Glencore in metals and ExxonMobil in oil, will work their way through to support prices next year. But as metals consumers, we know only too well that a metal is capable of going in one direction and another is capable of going in the opposite if the fundamentals are sufficiently diverse.

Unprofitable Metals

Prices for many metals are probably close to the bottom simply because the current market price is below the cost of production. Glencore has not curtailed production of copper and zinc out of altruism, it has done so because the mines it closed are not economically viable.

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Without courting innuendo, I am not going to enter into a long evaluation on the shape of bottoms and whether we can a expect sharp pointy one or a big, fat flat one, the reality is the shape will depend on the particular metal’s supply and demand fundamentals, and investors’ view of those fundamentals.

Check out part two of this article, featuring Stuart’s analysis of the oil market and several metals.

The Steel Manufacturers Association (SMA) recently supported lifting the ban on U.S. crude oil exports. The ban, enacted by the 1975 Energy and Conservation Act, applies to all crude oil exports except in limited circumstances.

This month, the House of Representatives approved H.R. 702, a bill that would formally lift the ban. Comparable legislation is pending in the Senate.

“The global energy landscape has changed dramatically over the past 40 years,” said Philip K. Bell, president of the SMA. “Today, the US is a world class leader in the production of oil and other energy resources. We have an opportunity to leverage these resources in foreign markets to the benefit of the domestic economy and its workforce. The export ban serves as an impediment to free and fair trade. Energy companies are unable to invest and produce to the extent that they would in an open market.”

Oil prices rallied as much as 30% from their lows in August but prices found resistance as they approached $50/barrel.

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Higher than expected inventory data helped bring crude back down to its price range last week. Prices have traded between $43-$50/barrel for almost 2 months.

Crude oil price fluctuating within trading range for almost 2 months

Crude oil prices fluctuating within trading range for almost 2 months. Source: MetalMiner analysis of @StockCharts.com data.

The Energy Information Administration report showed that US stockpiles rose by 8 million barrels in the week ended Oct. 16, well above expectations. Inventories dropped through the spring and summer, but it looks like they have resumed a rising trend and now stand at 476 million barrels, near their highest levels in 80 years. The report also showed robust domestic production at more than 9 million barrels.

US total crude inventories

US total crude inventories. Source: EIA.

Time will tell whether prices hit major bottom in August or if more price drops are to come. So far, prices are showing a lack of upside momentum, underscoring a lack of market confidence.

Strong production data and expectations that oil markets could be flooded by 500,000 barrels per day, once Iran’s oil sanctions are lifted, are hitting investor sentiment. Moreover, weakness in commodities markets across the board is really not helping push oil prices up.

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We are seeing similar behavior in base metals, where rallies are short-lived as investors haven’t found the confidence necessary to lift prices. The $50 a barrel and $43 barrel levels are 2 to watch.

Last week, oil nudged above $50 per barrel. US shale producers locked in new production at north of $50 for 2016 and 2017 delivery. This week it’s down below $50 again.

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Data from the Energy Information Administration confirmed a large addition to US crude oil stockpiles last week, another sign that a global oversupply of crude isn’t going away.

Oil Roller Coaster Now Down Again

While we saw some signs that metals prices might be going up this week – you guys hear about zinc and lead? – the oil roller coaster shows that we’re nowhere near out of the woods when it comes to commodities. My colleague, Raul de Frutos, didn’t buy it when a Reuters analysis said that oil had reached a bottom due to Fibonacci Retracements and, sure enough, crude fell again this week.

Oil prices wave theory

So much for the oil price bottom. Source: MetalMiner analysis of @StockCharts.com data.

We regularly caution readers to not follow Fibonacci sequences or other trading fads, but rather long-term trends with well-defined levels of support and resistance. Check out our forecast offering for more on that.

Lead and Zinc Back Up

Meanwhile, back with zinc and lead, Glencore cut production at many of its mines this week and nearly singlehandedly eliminated a surplus of the metals. Lead prices went up 9% in only 2 days and broke short-term resistance. Zinc, for its part, went up 10% and also broke short-term resistance.

That escalated quickly.

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When people ask us what we think about Fibonacci, we say we like fibonacci pasta. When they ask us if we count waves, we say yes, but only when we are at the beach.

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However, many analysts use Fibonacci Retracements and wave cycles to predict when a trend has reversed. In its technical analysis outlook for Q4, Reuters calls a major bottom for oil prices, based on their analysis of waves and Fibonacci retracements.

Oil prices wave theory

The oil prices wave theory in 5 easy steps. Graph: @StockCharts.com, analysis by MetalMiner.

Their outlook basically suggests that the current rally in oil prices will likely extend since prices have completed a 5-wave cycle. Moreover, a Fibonacci retracement analysis on the down trend suggests that the strength and duration of the last rally have confirmed a reversal.

Although the analysis seems very thoughtful, the fact that it’s relying on “magic” numbers makes us very skeptical. In addition, we just don’t believe in forecasting the future, whether it’s through fundamental analysis or technical analysis.

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The author could get it right, the precipitous fall in oil prices might be over. However, it wouldn’t be because of the wave theory… a less oversupplied market and a recovery in China are factors that could trigger a rally but neither seems to have happened yet. There is a long list of bearish factors that haven’t vanished from the market, whether related to OPEC oversupply, surges in inventories, or weak oil demand.

While commodities keep trending down and price drivers point downward as well, unlike Reuters’ technical analysis, we don’t rule out the possibility of further price declines in oil, and we will take the risk of being contrarian to wave theory and Fibonacci.

gas_local_565In the first 6 months of 2015, US gasoline consumption rose at the fastest rate since 1985 – another occasion on which the real price of oil halved over 12 months and stimulated demand. Not surprisingly, prime supplier gasoline sales/deliveries into US local markets are up the most over the prior year since 1988 as well. Source: Thomson Reuters.