Oil prices bottomed out in mid-April, when advanced economies were under their most restrictive phases of lockdown. The loss of economic activity drastically reduced demand and therefore price, and some short-term futures contracts were trading at negative prices due to concerns about storage. Since then, a combination of supply cuts following the end of the Russia-Saudi Arabia oil price war and the reopening of countries across the world has pulled prices back up. They are now around two-thirds of what they were pre-crisis.
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A major influence on the oil price has been China’s approach to its post-lockdown recovery. By doubling down on its strategy of state investment in construction and manufacturing, indicated by huge rebounds in industrial production, it has proved to be a major source of demand for commodities. Over 53,000 metric tons of crude oil were imported in June, the most on record. It is likely that China is also using lower prices to buy for the future — multiple projects are ongoing to increase storage capacity near some of its major ports.
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The price of copper — a yardstick for global economic growth — is also pointing to a strong recovery, though it appears to be largely driven by Chinese demand. After bottoming out earlier than oil, reflecting a stronger relationship with Chinese growth, the price is now at its highest in two years. Chinese imports of copper in June were also the highest on record, at 656,000 metric tons, and July’s figure is expected to top that.
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However, the price of gold, traditionally driven by sentiment, shows that investors are concerned about the scope of the recovery. Gold is a ‘safe’ asset, and its price tends to increase when the outlook for the global economy is negative. Even though global economic activity troughed in April, the gold price has continued its upward trend, rising nearly 25% this year. The price also reflects the trade-off between holding different assets — as yields on other safe assets such as government bonds have fallen, the fact that gold pays no interest has become less of a disadvantage. Investors’ concerns may prove to be true if major economies such as the US, Russia, and India fail to tame the spread of the virus, but recent medical breakthroughs keep us hopeful.
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