Commodities Watch: Copper Moves Up on Stategic Oil Release (JPM, GS, JJC, CU, COPX)

Yesterday’s announcement by the International Energy Agency that member nations, including the US, would release 60 million barrels of crude sliced 5% off the price of a barrel of WTI crude. Oil is down fractionally again today, and the differential that we noted yesterday between corn and wheat prices continues to widen. Another commodity that is gaining some ground today is copper, which should benefit from the fall in crude prices.

Analysts at both JP Morgan Chase & Co. (NYSE: JPM) and Goldman Sachs Group Inc. (NYSE: GS) have lowered their price estimates for Brent crude for the third quarter. Morgan’s analysts now believe that the average price for a barrel of Brent will drop -23%, from $130 to $100. Goldman analysts expect the price of Brent to fall to $105-$107/barrel by the end of July. Brent is trading at $105.65/barrel at around mid-day today, so it looks like both banks may be right.

The drop in crude prices has boosted copper prices today by about 1.3%, to $4.09/pound. Traders reason that spending less on energy acts as a stimulus to the global economy. That is certainly what the IEA hoped would happen when it made its announcement.

Demand for copper is expected to grow by 10% in 2011, compared to a projected supply growth of 3%. Demand may jump by another 10% in 2012, compared to supply growth of just 4%. Combined with lower energy costs, prospects for the red metal look increasingly bright.

The big unknown here is whether or not the IEA will continue releasing oil after the currently approved 60 million barrels. This release is set to end at the end of July, and is meant to replace lost Libyan production of about 1.5 million barrels/day.

Libyan production is not expected to regain its previous levels until the end of this year, and that will only happen if the country’s domestic turmoil ends. It’s unlikely that the fighting in Libya will end anytime soon.

It remains unlikely that the IEA would approve the release of 60 million barrels/month for the remaining five months of 2011. But if the agency spits out another 60 million barrels in August, that could drive the price of Brent well below $100/barrel and WTI even lower, perhaps down to $85/barrel or less.

While the total amount of the “oil stimulus” would be relatively insignificant on a global scale (about $6 billion/month at $100/barrel), the psychological effects would be substantial. Manufactured goods that use a lot of copper – houses, cars, appliances – could see an increase in demand that would only tighten copper supplies more. Lower prices at the pump have an almost magical effect on consumer spending.

So far today the iPath DJ-UBS Copper Total Return Sub-Index (NYSE: JJC) has risen about 0.75%, to $53.92, in a 52-week range of $38.13-$61.69.

The First Trust ISE Global Copper Index (NASDAQ: CU) is down -0.18%, to $38.69, in a 52-week range of $22.64-$46.85.

The Global X Copper Miners ETF (NYSE: COPX) is down -0.11%, at $17.56, in a 52-week range of $10.00-$20.98.

Paul Ausick