Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Copper Is Beating Oil in a Cooling Economy
Transcript
- Lucas: So copper is up more than four percent this week, and that's while oil is down five, and Brent is down nearly eight. That's a pretty big divergence, and it's not just a blip. Luna: Yeah, I mean, that's a big move in five days. What's driving it? Is it just the Iran de-escalation or is there something else going on? Lucas: It's partly the unwind of that geopolitical risk premium in oil. But copper isn't just catching a bid on that. It's been grinding higher for weeks now. If you look at the last month, copper is up maybe seven or eight percent while oil is basically flat. And that's a signal worth paying attention to. Luna: So what does it actually tell us? Is the market saying the global economy is strengthening, or is this more about supply side issues? Lucas: It's a bit of both, but I think the key is what copper is used for. Copper is in everything from wiring to electric vehicles to grid infrastructure. And when that price is moving up, traders are essentially betting on demand for industrial inputs. Oil, on the other hand, is more about immediate consumption and geopolitical risk. Luna: Right. So copper is kind of a leading indicator for growth, while oil is more of a current events barometer. Lucas: Exactly. And that's why this divergence is so interesting. Because we're seeing inflation cool, core CPI actually ticked down in June, and the Fed is probably done hiking. But copper is still rallying. That suggests the market believes we're going to see a soft landing, not a recession. Luna: But isn't copper also tied to China? And China's been kind of sluggish. Lucas: China is a huge consumer, but the copper rally isn't just about China. It's about the broader electrification story. You've got grid upgrades, data centers, EV charging networks. The demand for copper in those sectors is structural, not cyclical. And supply is tight because new mines take a decade to develop. Luna: So even if China's growth is mediocre, the rest of the world is picking up the slack? Lucas: That's the bet. And it's one that a lot of commodity funds are making right now. They see copper as the new oil, in a sense. The commodity that's essential to the energy transition. Luna: But oil isn't going away. I mean, we still need it for shipping, petrochemicals, aviation. Lucas: Absolutely. And that's why you're seeing oil and copper decouple. Oil is still a mature market with geopolitical swings. Copper is more of a growth story. And the market is pricing that in. Luna: So if I'm an investor, which one do I want to be in right now? Lucas: That depends on your timeframe. If you're looking at the next six months, oil could still bounce on any new Middle East flare-up. But if you're thinking three to five years out, copper has the better structural story. And the price action we're seeing now reflects that. Luna: And what about the broader commodity complex? We've got corn doing its own thing, up five percent. That's got to be weather-related. Lucas: Corn is a different beast entirely. That's all about weather and planting seasons. But the thing I keep coming back to is that copper is outperforming oil in a cooling economy. And that's unusual. Historically, when growth slows, oil and copper tend to move together. The fact that they're not is telling us something. Luna: So what is that something? Is it that the market doesn't believe the economy is actually slowing? Lucas: I think it's more nuanced. The market is saying the old economy is slowing, but the new economy is accelerating. And copper is the bridge between the two. You need it for the old stuff, but you really need it for the new stuff. Luna: That's a nice way to frame it. So if I'm a listener who wants to understand the macro picture, what's the takeaway? Lucas: The takeaway is that you should be watching copper as a leading indicator. It's telling you where the economy is heading, not where it's been. And right now, it's flashing a pretty bullish signal. Luna: And that's why the mining stocks are ripping. The XOP is up almost five percent this week, and that's mostly the oil and gas exploration names, but the copper miners are doing well too. Lucas: Yeah, the broader energy sector is up two percent, but the copper miners are really leading the charge. And I think that's a trend we're going to see continue. Luna: So, before we wrap up, I want to mention something that's been on my mind. We do this show ad-free, and that's only possible because of listeners who support us. If you've been getting value from these conversations, consider buying us a coffee. It's a small way to keep the lights on, so to speak. Lucas: Luna's right. It's a simple thing. You can go to buy me a coffee dot com slash fexingo. Every bit helps, and we appreciate it more than we can say. Luna: And we're not going to hound you about it. Just something to keep in mind if you're a regular listener. Lucas: Now, back to the copper story. I mentioned that supply is tight. There's a new mine in Chile that's been delayed, and a couple in Peru are facing community protests. That's not going to help the supply picture in the near term. Luna: So it's a double whammy: demand is strong and supply is constrained. That's a recipe for higher prices. Lucas: Exactly. And that's why I think copper has more room to run. But it's not without risk. If we get a hard landing, all bets are off. Luna: What would a hard landing look like for copper? Lucas: If the Fed has to hike again because inflation reaccelerates, or if we get a major recession in the US or Europe, copper could easily fall fifteen to twenty percent. But the futures curve is not pricing that in right now. Luna: So the market is saying soft landing is the base case. Lucas: That's exactly what it's saying. And the copper action is one of the clearest signals of that. Luna: So for our listeners who are maybe new to commodities, how do they play this? Is it just buying copper futures, or are there other ways? Lucas: You don't have to touch futures. You can look at copper miners or an ETF that tracks base metals. But it's important to do your own research. Copper is volatile, and it's not for everyone. Luna: Yeah, I'd say it's more of a strategic allocation than a short-term trade. Lucas: Right. And if you're going to do it, do it with a long-term perspective. The electrification story is going to play out over years, not months. Luna: That's a good note to end on. So to sum up: watch copper, it's telling you the economy is transitioning, and that's a good thing for a lot of industries. Lucas: And if you want to support the show, you know where to find us. Thanks for listening, and we'll catch you in the next one.