One Commodity with Fundamental Potential

02/09/2015 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Sharply lower crude oil prices have impacted most of the commodity markets but there is one where MoneyShow's Jim Jubak sees a long-term balance between supply and demand.

One of the things that's interesting about the commodities space as a whole is that oil is pretty much driving the prices for everything else; that when oil rallies a commodity that is not particularly related to oil, such as copper, goes up to. When oil is in the downturn fearful, copper falls as well, in the sense of oil demand on global growth and copper is probably the commodity most related to global growth rates, to Chinese growth rates, so there is some logic here. The interesting thing to me is that the fundamentals of the two industries, oil versus copper, are really very very different. I don't think you can find a good solid case to be made that there is a supply side problem for oil, that we're looking at a situation where oil supplies are going to be tight because producers simply cannot find enough oil or they can't produce enough oil or something like that. That doesn't seem to exist on the oil side and that puts a kind of limit in the medium term on how far oil prices can recover. I think $65 is certainly reasonable a barrel, $100 is probably a lot further out than that.

Copper, on the other hand, has some actual supple side problems. They're relate to falling ore grades around the world that you can open a copper mine, but if your ore grade is sufficiently poor, it doesn't produce a whole lot of copper for the effort and that's what we're seeing a lot with established mines. We're seeing a lot of geopolitical instability, Freeport-McMoRan Copper and Gold have a big big big mine in Indonesia and the Indonesian government is doing all kinds of really weird things with royalties and licenses, etc. You've got copper mines in some of the least stable countries in Africa. All of that is kind of background. You have falling ore grades. Right now you're looking at a situation where maybe not in the next six months or eight months, but looking a year out or two years out you can certainly see a point where copper will go back into scarcity or copper supply will not be available to meet demand, depending on what your projections of demand are, but basically a very different set of fundamentals than in oil.

If you're looking for a way to play a commodities rally as a whole that is based on oil, you might want to actually look at copper instead. The fundamentals are better. I think you're going to get a decent price swing with oil, so oil improves, but also copper has, I think in the six to 12 month period I think you have better fundamentals in copper. You might want to look at something like Southern Copper, (SCCO), one of the low cost producers with mines in Latin America, relatively stable politically, so I would look at that as part of any package of commodities, along with whatever I'm doing in oil.

Related Articles on COMMODITIES