The copper price (3M LME) increased by 2% yesterday

Crude

Unlike the API data on US oil inventories released on the day before, the official EIA’s report released on Wednesday showed further strong built in stocks had taken place last week. This had led to a renewed widening between the prices of Brent and WTI.

Let us recall that price of the front-month contract on WTI increased significantly since the end of January as weekly Baker Hughes data have showed continuing slump in active rig count in the US and therefore have suggested a slowdown in oil production growth in the US. Recent decline in prices may thus have been, at least to some extent, caused by a revision of “too-optimistic” expectations - as far as the timing of rebound in oil prices is concerned - of some investors.

Regarding the new EIA short term forecast, it unveiled that the agency slightly revised its forecast for this year’s US oil production to the upside (in comparison with the last month’s report). Moreover, the agency says that “projected 2015 oil prices remain high enough to support continued development drilling activity” in the key shale regions, though the pace of production growth is expected to slow down vis-a-vis the previous years. The agency added that “the forecast remains particularly sensitive” to actual oil prices.

As for the latter, we believe that every episode of higher oil prices (such as that in the beginning of February) is being utilized by oil producers to hedge their future production and allows them to continue drilling. This consequently poses risk for bets on the timing of rebound in oil prices.

Base Metals

The copper price (3M LME) increased by 2% yesterday as China’s credit growth in February exceeded market expectations and spurred bets on stronger demand for the metal. On the contrary, aluminium lagged behind its peer and its price increased by mere 0.17%.

However, the aluminium market may be far from dull in the coming months. The potential implementation of even stricter rules for the loading out of metals from the LME warehouses as well as rising likelihood of interest rate hike in the US could lead to a faster decline in aluminium inventories and thereby a decline in prices (and physical premiums). This factor, along with a possible slight decline in oil prices in the short-term, presents a negative risk for our otherwise relatively optimistic forecast for the development of aluminium prices this year.

Chart of the day:

Number of short and long speculative positions in WTI is approximately equal which suggests that high uncertainty about future oil prices still persists among investors.