Crash in Commodities Just Started

It certainly hasn’t been a good year for commodity investors.

Unfortunately if you’re a resource punter, it won’t get any easier any time soon.

Resource Speculator readers are well prepared for what lays ahead. After I turned bearish on commodities in November 2014, I’ve been preparing them for the ongoing destruction all year.

They know we’re not at the bottom. Yet, they understand when commodities should see a turnaround. They also know why. It comes down to a mix of base metal supply cuts, maximum pessimism and rising geopolitical conflict. To find out more, click here.

In the months ahead, expect commodity prices to fall to vastly lower lows. There will be huge destruction across the industry.

The resources space will turn into a game of the last one standing. While many over indebted players have already closed shop, it will get much worse. Expect many big players to close their doors in the months ahead.

Crude oil set to crash

If you think this is something to sniff at, think again. Just look at what the mainstream media says. Here’s Reuters with an update on crude oil this week:

Crude oil fell on Monday, reversing an early rally after a survey estimated higher OPEC output in November, while a stronger dollar weighed on demand for commodities priced in the currency.

U.S. government data showed no meaningful decline in shale oil output in September despite a steady drop in rig counts, another factor that pressured crude, along with a tumble in U.S. gasoline and ultralow sulfur diesel futures before expiration of their front-month contracts.

Brent crude futures settled down 25 cents, or 0.6 percent, at $44.61 a barrel, erasing an early rally that sent Brent up nearly $1.

U.S. crude’s West Texas Intermediate (WTI) futures finished down 6 cents at $41.65, versus a session high at $42.61.

‘Both Brent and WTI fell about 10 percent for November.

It’s no surprise that oilers have seen their share prices hammered across the board this year. With the crude oil price declining, revenue shrinks. Management have to decide either to cut expenses (i.e. sacking employees) or cut production, which hits revenue.

Oil companies have opted for the first option. Production continues to stay stable, seeing supply rising in a low demand environment. Unfortunately, this will merely prolong the glut in crude oil prices. But, these oil cowboys don’t think crude oil prices will stay low.

It will come down to a survival of the fittest. I have been warning Resource Speculator readers all year about these conditions. I’ve got a few oilers on the portfolio at the moment, but haven’t dived deep into the industry yet. Further destruction will come and when it does, readers will clean up. They will buy the best stocks at near share price lows.

No commodity is safe in the final phase of the resource bear market. Another commodity set to get crushed in the months ahead is copper.

Copper set to get clobbered

I warned Resources Speculator readers that ‘copper will become the next iron ore’ back in January. On this matter, here’s the latest commentary from the Australian Financial Review:

Copper prices, bumping along near six-and-a-half-year lows of $US4443.50 a tonne hit a week ago, ended November with a 10 per cent loss, the biggest monthly decline since January.

Copper got only a modest boost from Chinese producers’ plan to cut output as gains were capped by a strong US dollar and concern over the economy of top metals consumer China.

Nine large copper producers in China agreed at the weekend an initial plan to cut refined metal output by more than 200,000 tonnes in 2016, following moves already announced by China’s nickel and zinc makers.

Many investors were sceptical that the output cuts would be implemented because of the past tendency in China to keep open loss-making operations to preserve jobs.

While many think the copper crash is overdone, unfortunately this couldn’t be further from the truth.

The majority of copper is used in housing construction. The Chinese have bid the price of copper higher over the last couple of years and now, this trend has run out of steam. It’s clear to everyone that the Chinese economy is starting to crash. And copper is sinking with it.

In the months ahead, while there will probably be another bear market rally or two, copper is set to hit new lows. Many producers didn’t expect prices to get this low and are starting to cut production.  This is a sign that the bear market end is near. Yet, we’ll have to see more causalities and larger supply cuts before it truly ends.

There’s a lot more to this story, which I’ll be covering in Resource Speculator over the coming months. In the meantime, expect the next couple of months to be exceptionally vicious. Many resource companies are likely to go under.

During this time, there will be plenty of bargains on offer. Pick the best companies and you’ll not only survive the bear market, you’ll make a fortune in the next bull market. If you want to know the best time to buy commodities, and the best miners digging them up, check out Resource Speculator here.


Jason Stevenson,
Resources Analyst, Resource Speculator

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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