Oil and iron ore surge points to new mood
An oil worker adjusts the wheel of a flow valve on a modern oil pumping unit at an oilfield operated by Embamunaigas, a unit of KazMunaiGas Exploration Production, in Akkystau village, near Atyrau, Kazakhstan, on Saturday, July 4, 2015. The majority Muslim country is central Asia's biggest oil producer. Photographer: Andrey Rudakov/Bloomberg©Bloomberg
Oil on Monday jumped back above $40 a barrel for the first time this year and iron ore saw its largest one-day gain on record, as more traders bet that the worst of the 20-month commodity rout is over.
The slump in oil and other commodity prices had raised concerns for the health of the wider economy, with central banks warning of a possible deflationary spiral and a sharp slowdown in emerging market growth.
But moves by some of the world’s largest oil producers to agree an output freeze have helped to put a floor under prices, with Brent crude rebounding by 50 per cent since mid-January.
The international oil benchmark gained 5.6 per cent to $41.04 a barrel — the highest since mid-December. It remains, however, well below the $100 a barrel level it averaged near between 2010 and 2014.
Iron ore, one of the key commodities for many miners, rose almost 20 per cent to $62.60 a tonne on Monday — the biggest one-day rise since the index began in 2009.
Officials in China, the world’s largest importer of oil and metals, have vowed to avoid a hard landing as they try to move away from manufacturing and infrastructure spending towards a more service-based economy.
While analysts caution that excess supplies in many commodity markets should continue to weigh on prices, the near panic-level selling seen in January has abated. “I think that if we’re not at the bottom then we can’t be far off,” said Julian Kettle, head of metals at Wood Mackenzie. “People are starting to get far less negative about China.”
Natural resource stocks have been some of the biggest beneficiaries, with Glencore’s and Anglo American’s share price both almost doubling since the beginning of the year after being the worst performers on the FTSE 100 in 2015. They led gains on Monday alongside Chilean copper miner Antofagasta, which is up 75 per cent since January 20.
China will tackle overcapacity in its steel and coal sector, policymakers said at the annual meeting of the national legislature in Beijing at the weekend. Copper, aluminium and zinc have all rallied by between 10 and 25 per cent since January, when they hit the lowest level since the financial crisis.
Officials from Saudi Arabia are due to meet their Russian counterparts in the coming weeks to see if the world’s top two oil exporters can lead other producers to freeze output, as many have seen their national budgets squeezed by the price collapse.
Hedge funds have largely switched from betting against the oil price at the start of the year to positioning themselves for further gains, regulatory data show.
US oil production has started to decline in the face of lower prices, though companies may keep output going if the price recovers further, probably damping the extent of any rally.
“We’ve seen a return of risk appetite,” said Michael Wittner, analyst at Société Générale. “[But] it’s going to be volatile and it’s not a slam dunk that prices keep going up from here in a straight line.”