It is not new news that the commodity prices have been under pressure for the last year and a half. Back in July 2014, crude-oil prices were above $100. Today, it barely is above $40. Heating oil was above $3, and now it is under $1.4. Natural gas was above $4.5, but is under $2.4 today. A similar story is repeated in other commodities across the spectrum. If you track the commodities, you will see that seven out of 10 analysts don’t see a rebound happening any time soon. Reserve Bank of Australia recently released a statement on Nov. 17, 2015, saying the scope for a rebound is limited. Multiple banks have said they see copper prices are likely to fall further. There clearly is a lack of demand, and a supply glut is staring at us for the near future.
Remember the old stock-market saying? If it is in the news, then it already is accounted for. Meaning, since the public opinion seems to be bleak, the commodity prices already account for that pessimism. It raises questions, though. Are we being too pessimistic about the commodity prices? Is our pessimism going to lead us to miss out on a major bull run? Or are we in a late-2008 type of situation where the market was 40% down, so you’d think, “How much more can it fall?” You invest, hoping for a turnaround, and guess what? It falls another 30% over the course of the next few months. It happened with me. To know if we are being too pessimistic, we need to take a look at where we are from a historical context.
Where Are We on a Historical Timeline?
For the sake of simplicity, let’s pick a limited number of commodities. Copper and oil widely are used and because of that, they also are an indicator of economic health. So let’s go with them. If we zoom out 15 years to the year 2000, we get a little bit of clarity. A few conclusions to draw (refer to the graph below):
- Oil prices are pretty close to where they were at the bottom of the market correction of 2008. It seems to have traced back whatever gains it made post-2008 crisis.
- Prices still are not close to where they were in the early 2000s. It is hard to believe oil was around $20-$30 per barrel. So on the topic of how low can it go – $20 per barrel is not a crazy figure. That is roughly 50% down from where we are.
- Copper seems to have traced back 50% of the gains it made since the 2008 crisis.
- There still is some distance to go from previous lows of the 2008 crisis or early 2000s. A good resistance level for copper would be around $1.3 at this stage. That is roughly 40% from where we are now.
If we draw a long-term trend line, we see that oil seems to have fallen below that 15-year trend line. Oil prices did try to recover the middle of this year, but seems to have bounced downward from that trend line. If oil prices go back above $60, it will be a good sign this is part of a longer bull run that started in the early 2000s. The same could apply to copper if it bounces off from its current price, which also is close to its trend line; that might be an indication for a bull run.
Where Are We on an Even Longer Historical Timeline?
Stretching prices beyond the 2000s starts to lose its shine. It was a different world in the ‘60s and ‘70s. Means of production has significantly changed; countries that are major consumers or producers have changed; wars have happened (which usually produces a lot of commodity demand); China’s phenomenal growth has happened etc. Nevertheless, it is interesting to see where we are on a 50-plus-year timeline. Notice that oil crossed $100 level prices twice in the last 70 years, and the world is not new to $20-$40 levels. We have seen major booms and busts while oil was in that range.
The Bottom Line
Coming back to our original question: Are we being too pessimistic in our view of the commodity prices? My answer to that question is “no.” If you noticed the 600% rise in oil prices from the 1970s to the 1980s, it is hard to imagine the prices will come back to levels last seen in the 1940s. If you noticed the 700% price increase from the late ‘90s to the late 2000s, it is hard to imagine the prices can drop to $40s. So it might be hard to imagine, but when Goldman says oil could fall a further 50% to $20 a barrel – let’s just say they are not talking out of their hats.
Image courtesy of Danilo Rizzuti at FreeDigitalPhotos.net