Understanding Recession Risks: A Look at These Commodities

Signs of Global Economic Slowdown

The signal of a recession is not in stocks (which have recovered), but in key commodity prices.

Oil Prices Slip Amid Global Demand Uncertainty

On Tuesday, August 13, oil prices slipped after a five-day rally, signaling weakening global demand despite fears of escalating conflict in the Middle East.
The uncertain and fragile consumption outlook led OPEC to cut its demand forecasts for this year and the next, causing crude prices to fall.
The U.S.
alert about a potential imminent Iranian attack on Israel, which could disrupt crude supplies from the region, failed to boost prices.

Examining Commodity Prices for Economic Trends

Aside from oil prices, the movement of other key commodities is being closely watched by analysts and investors for signs of economic recovery or recession.
Among these, copper stands out.
Let’s delve into what these commodity prices are suggesting.

Are We Heading Towards a Recession?

Commodity prices have plummeted in the past month, indicating an underlying weakness in the global economy, despite the U.S.
stock market bouncing back from recession fears.
While U.S.
stocks reclaimed most of their losses last week, driven by strong sell-offs triggered by weak labor and production data, commodity markets might tell a different story about the global economy.

The Invesco DB Base Metals Fund has dropped over 7% in the last month, while crude oil futures have shed 14% from July 5th to August 5th.
Rob Ginsberg, CEO of Wolfe Research, pointed out that the entire commodity asset class is under pressure, with prices dropping significantly, signaling a potential economic downturn.

Signals from Copper Prices

At the beginning of the year, copper prices surged on expectations of a “supercycle” where demand would surpass supply, driven by the metal’s crucial role in growing sectors like electric vehicles, semiconductors, and renewable energies.
However, copper futures have plummeted by 21.4% from the 2024 peak of $5.19 per pound on May 20th to $4.0367 on Tuesday morning, with a nearly 12% drop in the past month.

Bart Melek, Global Head of Commodity Strategy at TD Securities, emphasized that the narrative of the supercycle is fading rapidly due to China’s weakness, the second-largest economy globally, which is weighing particularly on copper and oil.
Global production data has also subdued these two commodities, suggesting they might be in surplus rather than the expected tight market.

Oil Prices and Economic Alert

While oil has found support from ongoing geopolitical tensions in the Middle East, weak demand in China has been weighing on the market for months.
OPEC lowered its global crude demand growth forecasts for this year by 135,000 barrels per day on Monday due to dimming expectations about the dragon’s growth.

Melek stated, “Both energy markets and base metal markets, including copper, reflect a slower economic environment where there is likely to be less demand growth, reducing the risk of supply shortage conditions.” When commodity markets are tight due to consumption pressure, prices rise – a context that experts do not see prevailing.

Oil has fallen in the last month, with futures dropping by over 3% from $82.17 per barrel of WTI on July 8.
The impending Iranian attack on Israel isn’t pushing oil prices high enough, indicating that the winds of recession (or simply weak growth) are prevailing for now.