Why the demand-side factors becoming more influential than supply-side factors: In commodities, demand side effects tend to lag. If you get big orders to get copper motors, which you won’t deliver until at least six months later, then that means you need to buy a lot of copper and use a lot of electricity to manufacture them, which is the basic reason for the connection.
On China: That is why China is such a big factor. We are big believers in following patterns in global PMI (purchasing managers’ index) data, and we have seen trends in commodities and oil, especially, which is highly correlated to Chinese PMI. If the one-month reading is above the 3-month moving average, then we anticipate oil to go up in the next six months 70% of the time. Vice versa, if one-month is below the 3-month average, oil is likely to drop.
So, when global PMI stays positive, the probability of a commodity rally to last 9 months or longer increases. These are some of the tectonic shifts we have seen in global markets. The problem is that while easing during expansion pretty much guarantees a further rally in stocks, PMI tends to rise only in about 6 out of 10 cases. In essence, the PMI figures are a leading indicator highly correlated to commodities, while the stock market is an indicator correlated to earnings.
On US fracking: In hydrocarbons, frackers have become a huge factor on the supply side – US fracking technology has improved so much, that actually, recently, they have been pumping some of the natural gas back into Texas on the back of strong supplies.
Alternative energy is another big trend. In fact, renewable sources such as turbines are increasingly being integrated into or combined with extraction of natural gas and fracking. This is driving down the cost of electricity, and therefore the costs of exploration. That keeps oil range-bound; every time oil rallies beyond the USD80 per-barrel level, frackers ramp up production and it drops again.
The current price level on gas in particular is still deflated, so for now, fracking activity has slowed, unlike earlier this year. But few other countries have really embraced this technological advancement, which has created a natural neutralizer to oil prices shooting up above USD100 per barrel, which it probably never will again.