Week-in-Review: All We Have to Fear is Oversupply, Itself

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Stock market index

The price of oil slipped below $27 this week and panic ensued in places other than the disco. Global stock markets fell as investors feared the worst and followed the Royal Bank of Scotland‘s advice and sold everything but bonds.

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The Dow Jones industrial average was down more than 8% on the year and US equity funds have fared even worse. They were down 10.4% earlier this week. After a steep sell-off Wednesday, global stocks were mixed Thursday with Asian markets continuing the previous trading session’s sell-off as oil prices continued to fall. European and then US stocks got a lift after the European Central Bank  hinted at further stimulus measures.

Can the US steel industry finally catch a break? Source: Adobe Stock/Inzyx.

Can the US steel industry finally catch a break? Source: Adobe Stock/Inzyx.

My colleague Stuart Burns adroitly pointed out that while commodities such as oil, and the metals we track daily, are oversupplied, none of this has anything to do with demand. Most of the panicked investors are scapegoating China and demanding more stimulus, a course of action that would actually worsen the oversupply and the slowing economy there.

Like a tourniquet applied to stanch the bleeding of a limb injury, the oversupply that oil drillers and miners have built up to force out competitors — and the currencies purposely devalued to encourage exports — are now figuratively killing the limb.

Of course, that doesn’t mean the State Reserves Board won’t try it.

I am the oversupply. Fear me.

I am the oversupply. Fear me.

Producers have been, to a large extent, their own worst enemy. Just look at the position Freeport McMoRan has put itself in, divesting part of its largest asset, the Glasberg mine, and all.

In times like these, we like to accentuate the positive. Steel-Insight’s James May reports that, thanks to anti-dumping actions and falling capacity, US steel mills are finally in the “sweet spot” that will allow prices to rise.

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What a concept, eh? Rising metal prices. My colleague Raul de Frutos helpfully pointed out this week that we’ve actually been in a bear market for awhile and it could keep going so long as that pesky oversupply is there. Even that “sweet spot” James mentioned for US steel mills is a short-term thing. A  paper ring. Prices will fall back to earth later in the year.

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