2015 has been better for the oil price than many expected, with Brent Crude up 40% since January.
Many analysts expected it to punch higher, to $70 and beyond. But now it looks like the recovery is running out of steam, or rather gas, as it retreats to $63. That could spell more bad news for investors in oil majors BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB).
It looks like a similar story for commodities, as sentiment towards copper and iron ore starts to corrode once more, with predictable consequences for mining giants BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO).
Oil Lake
The resurgent US dollar in recent days is partly to blame in both cases. Because oil and commodities are priced in dollars, when the greenback strengthens they become more expensive for non-dollar earning countries to buy, hitting demand.
Oil has also been hit by the belated recognition that although US inventories have been slowly falling, they nevertheless remain close to all-time highs. Huge stockpiles of US crude are still washing around waiting to be sold, and that is before Iraqi and Iranian oil hits the market.
The Long Game
Furthermore, Credit Suisse has noted that speculative positions in oil are “excessive” and appear to have peaked.
It says net long positions in oil have hit all-time highs, and historically, once they roll over the oil price falls significantly.
On the last four occasions that happen, the oil price fell by between 12% and 60%.
But the bank did hold out some hope for all investors, saying that after near-term weakness could rebound to $71 a barrel in the fourth quarter.
Heavy Metals
Near-term metals weakness could stretch far longer if Citigroup is correct. It has just downgraded its iron price forecast to $55 a metric tonne from $81, blaming falling demand, lower costs and cheap expansions.
It expects global demand to shrink by more than 60 million tonnes 2018 and 2025, as Chinese demand for steel falls away, and scrap availability rises.
China still accounts for half of all global steel demand, more than twice Japan, India, the US and Russia combined, but consumption fell 6% in the first quarter, according to China’s Iron and Steel Association, as its property boom finally tops out.
Citi says BHP Billiton and Rio Tinto can counter this by boosting output cheaply, which may help cement their margins and market dominance, but the resulting lower prices will still squeeze revenues.
There may still be good reasons to invest in BP, Royal Dutch Shell, BHP Billiton and Rio Tinto (primarily the dividends, assuming they are sustainable), but the commodity super cycle is no longer one of them.