Oil Prices Slump Opens Metals To More Downside Price Pressure

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Crude oil hit new multiyear lows last week after the Organization of Petroelum Exporting Countries’ meeting in Vienna last week failed to address a growing supply glut.

Crude Oil Hits lowest level since 2009

Crude oil hits its lowest level since 2009. Source: @StockCharts.com

Although many people believed that oil prices had found a floor earlier this year, we didn’t subscribe to that view.

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The latest decline suggests that further declines might be around the corner. Low oil prices have a double negative effect on commodity prices:

  1. Oil is  not just a commodity, itself, but an asset closely followed by commodity investors. Falling oil prices make investors move away from commodities and, of course, industrial metals.
  2. Oil is the main benchmark for energy prices. Lower energy prices mean lower transportation costs and lower production costs, especially for those energy-intensive metals like aluminum.

For these reasons, it’s not strange to see that the trend of industrial metals looks very similar to that of oil prices:

Industrial Metals ETF

The Industrial Metals ETF is going the same direction as oil. Source: @StockCharts.com.

What This Means For Metal Buyers

The recent decline in oil prices is just another indicator hinting that metal prices will continue trending lower as we enter 2016.

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