Dividend Stocks

Oil and Copper Are Sputtering

Oil falls back under $70 … weak Chinese demand is hurting prices … is Louis Navellier still bullish on oil stocks? … copper’s price continues to fall … how Eric Fry sizes up the opportunities and risks

In recent days, oil has fallen back below $70.

Among the reasons why, legendary investor Louis Navellier is eyeing “concerns about growth in China.”

Here’s Louis from yesterday’s Special Market Update podcast in Accelerated Profits:

China’s PMI came out, and it declined for the second month in a row. That has folks worried because it’s well-under 50, and anytime it’s under 50, that signals a contraction.

This is why commodity prices are down 30% in the past year. We’re waiting for China to rejoin the world economy and they don’t seem to be gearing up.

And that, obviously, has been weighing on crude oil prices.

Here’s more context from Bloomberg:

China’s muted economic rebound and Beijing’s reluctance to deploy large-scale stimulus are reverberating around the globe, crushing commodity prices and weakening equity markets.

Investors are pegging back their expectations for the world’s second-biggest economy as worries mount that its recovery from pandemic restrictions has lost momentum. 

Recent data suggest gross domestic product growth this year will be closer to the government’s target of about 5%, contrary to expectations of a large overshoot formed earlier in the year. 

This is major news for oil investors because China accounts for roughly 15% – 20% of total global oil demand. Worse, expectations were that the Chinese economy would come roaring out of its Covid-lockdowns, with oil demand clocking in even higher than average.

To illustrate, back in March, research firm Wood Mackenzie estimated that here in 2023, China would make up not just 15% – 20% of the world’s oil demand, but roughly 40%.

Instead, the reopening is stumbling.

Here’s The Wall Street Journal:

China’s era of rapid growth is over. Its recovery from zero-Covid is stalling. And now the country is facing deep, structural problems in its economy.

The outlook was better just a few months ago, after Beijing lifted its draconian Covid-19 controls, setting off a flurry of spending as people ate out and splurged on travel.

But as the sugar high of the reopening wears off, underlying problems in China’s economy that have been building for years are reasserting themselves…

Instead of expanding at 6% to 8% a year as was common in the past, China might soon be heading toward growth of 2% or 3%, some economists say.

This is not the tailwind for oil prices that investors wanted.

But will the OPEC+ meeting next week offset this China-weakness, or will internal disagreements keep prices soft?

We’re seeing yet another feud brewing between Russia and Saudi Arabia.

Here’s the WSJ with the overview:

Tensions are rising between Saudi Arabia and Russia as Moscow keeps pumping huge volumes of cheaper crude into the market that is undermining Riyadh’s efforts to bolster energy prices, people familiar with the matter say. 

Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, has expressed its anger to Russia for not following through fully on its pledge to throttle production in response to Western sanctions, the people said. 

The friction comes just before an important meeting between members of OPEC and a group of Russia-led oil producers, (together, known as OPEC+) in Vienna this coming Sunday. On the docket is OPEC+’s production plan for the back-half of 2023.

Here’s Louis from this week’s Special Market Update podcast in Accelerated Profits:

[At this OPEC+ meeting] we do expect another potential cut, or announcement of a cut. The problem is, when they announce these cuts, they cheat.

So far, we can see Russia is cheating on its proposed cuts.

The latest time Saudi Arabia and Russia bickered about production (back in 2020), the Saudis became furious and launched a price war that triggered a price collapse. Sure, those lower prices hurt Saudi Arabia too, but as long as it hurt Russia worse, that was good enough for the Saudis.

So, this simmering tension is not a great backdrop for the Sunday meeting.

Does all of this change Louis’ big bet on oil?

Regular Digest readers know that Louis has steered his subscribers into top-tier oil and gas plays over the last year, resulting in a string of big returns.

But given the price pressure we’re seeing today and the latest from China and OPEC+, is his bullishness on oil changing?

Back to Louis’ podcast:

Crude oil inventories are very low; so are the inventories for refined product.

So, I’m still very comfortable with my energy picks because demand is going to be very, very strong for the next few months.

To Louis’ point, below, we look at the U.S. Crude Oil Stock over the last year.

As I write, we’re down more than 15% from one year ago, and we’re approaching the lows from December of last year.

Source: YCharts.com

Plus, one has to believe that at some point, the Biden Administration will begin replenishing the Strategic Petroleum Reserve, despite months of empty promises to do so.

If/when that finally happens, it will provide upward pressure on oil prices.

We’ll keep you updated with Louis’ latest oil-market analysis here in the Digest.

Meanwhile, the slow growth in China is impacting another commodity that our analysts have highlighted in recent months

Let’s return to the WSJ:

Disappointing [Chinese] construction activity is weighing heavily on many commodities markets.

Copper — long considered a barometer of an economy’s health because of its wide range of uses — has dived below $8,000 a ton while iron ore has breached $100, unwinding all of the gains made after Beijing called time on its Covid Zero policies late last year. 

China is the world’s biggest buyer of items like crude oil and copper, and its vast steel industry accounts for well over half of global iron ore demand. 

Regular Digest readers know we’re bullish on the long-term potential for big gains from copper.

Much of our enthusiasm is due to research put together by our macro specialist, Eric Fry, editor of Investment Report.

As Eric has pointed out, we can’t have a green future with EVs in every driveway (and amazing new technologies in every home) without batteries, which are hugely reliant on copper.

On that note, here are some numbers from Eric:

The average EV uses almost half as much copper as the average American house, and EVs aren’t the only “green” products that are “metal hogs.”

– Wind energy uses five to 10 times more copper per unit of electrical energy than does the conventional burning of coal.

– Photovoltaic solar power uses six times more copper per unit of electrical energy.

– A Tesla Model 3 requires 240 pounds of copper, which is nearly four times what a midsized internal combustion vehicle requires.

Therefore, as the renewable energy boom gains momentum, it will produce an echo-boom in demand for key battery metals.

But what about copper’s flagging price today?

After hitting an all-time high of $4.94 in March 2022, copper’s price has been sputtering.

As you can see, it’s 26% below its peak.

Source: StockCharts.com

Here’s Eric’s take:

[Despite the price pullback], the price of copper does not at all indicate that demand has slowed…

…While prices may be struggling under the weight of a year-long bear market, demand has?not?ceased – and it will not.

The Canadian metals mining firm,?Teck Resources Ltd. (TECK), predicts that copper demand for EV battery production will jump 750% this decade – from 210,000 tons in 2020 to 1.8 million tons.

Alongside that surge, Teck predicts copper demand for EV charging stations will soar more than?1,000%?by 2030.

All else being equal, therefore, copper prices should trend higher for several years. 

But Eric points out an issue that’s a big headwind for our economy, but a tailwind for investors…

The copper supply is under extreme geological pressure; ore grades at the world’s major copper mines are declining.

As this decline intensifies, copper supplies do not merely become less plentiful, they also become more expensive to extract.

Here’s what Eric sees as the result:

Robust future demand growth for copper is fairly certain, but the mining industry’s capacity to satisfy that growth is not.

That’s the sort of equation that should put upward pressure on the copper price for many years to come.

How do you invest?

In past Digests, we’ve highlighted the Global X Copper Miners ETF (COPX) to play copper. It holds top miners including Freeport-McMoRan, Antofagasta, BHP Group, and Ivanhoe.

Eric has recommended COPX in the past as well. His official trades have profited to the tune of 100% and 85% respectively (he sold in tranches).

Today, COPX trades 24% below its April 2022 high.

Source: StockCharts.com

But if Eric is right, rather than be scared off by this price-weakness, we should see it as a discounted purchase price on a decade-long growth story.

Here’s Eric to take us out:

The picture is clear: Demand for copper (and other elements necessary for EV production) is strong – and there’s no slowdown in sight.

The only problem is, right now, we don’t have enough of these battery metals to meet runaway EV demand.

In short, we’re heading straight into a massive battery metal shortfall…

And therein lies a massive opportunity…

I explain it all here  – where I also detail how big this opportunity is (hint: it’s in the trillions) … the five battery metal plays that I think will lead this frenzy… and one tiny powerhouse that will be along for the ride.

Get all the details here.

Have a good evening,

Jeff Remsburg