Oil, aluminum, nickel prices rally

 ( Photo: Shutterstock )

(Photo: Shutterstock)

Although the S&P 500 has largely erased its losses from the past month, financial analysts are mostly in agreement that stock market volatility is back, after almost two years of smooth upward movement. Commodities, too, are getting in on the action—the same geopolitical worries like tariffs, sanctions, and Mideast conflict that gave the stock market jitters have had even more profound effects on resources like crude oil, aluminum, and nickel. The news isn’t all bad, though: you can’t have growth without inflationary pressures on commodity prices, so the fact that these resources are becoming more expensive is a positive signal for continued macroeconomic growth.

We’ll tackle each of these commodities in turn and explain their effect on the American economy and the transport and logistics industry.

Oil keeps climbing; Brent-WTI spread widens

In January FreightWaves reported on the state of the American oil industry and the importance of the Brent-WTI spread, which measures the difference in price between the international crude oil benchmark (Brent) and the American crude oil benchmark (West Texas Intermediate). While innumerable factors affect the price of oil—and we’ll get into that in a moment—the Brent-WTI spread is useful for gauging the relative attractiveness of American oil on international markets. The cheaper WTI is compared to Brent, the more American oil is discounted against the international standard and the more demand there will be for American oil exports. 

In 2017, the Brent-WTI spread averaged about $3.33; today it’s at $5.33 (Brent is at $74.44 and WTI is trading at $69.11). The price of WTI has climbed 17.1% since mid-February, even though the Baker Hughes Rig Count has increased 26.3% (from 798 to 1,008) during the same period. The fact that price and supply are rapidly growing in sync with each other is very bullish for American oil production—and as we’ve reported, flatbed trucking rates—but it also indicates that WTI supply isn’t driving crude prices. 

What’s making oil more expensive? Last week’s missile strikes against Damascus and Homs, in response to the Douma chemical attack and over the protestations of Russian officials, certainly caused a spike in prices, but broader policy decisions have been more determinative. Specifically, OPEC’s policy since early 2017 of cutting oil production to reduce international petroleum inventories and firm up prices, which has happened to coincide with strong GDP growth in the all of the world’s major regions, has been mostly responsible for the current price climate. OPEC agreed last November to extend those production cuts through 2018, and are currently beating their targets to reduce production. Saudi Arabia in particular is interested in keeping oil prices high—and even raising them—because the kingdom wants to take Aramco, its state-owned oil company, public in Q1 2019, and the more valuable oil is, the more money the Saudis will raise from capital markets.

The bullish outlook for the American oil industry means more truckload miles as demand for rig moves, frac sand, water, and general oilfield services rise with production. Flatbed capacity in the Louisiana-Texas-Oklahoma sweet spot of American oilfields is already tight, and FreightWaves expects further upward movement on flatbed rates in lanes associated with the petroleum industry.

Aluminum is the most expensive it’s been in 7 years

Last week FreightWaves reported on how rising steel and aluminum prices are affecting the cost of trucks and trailers. Aluminum prices are still soaring due to new sanctions on Russia’s United Co. Rusal and its oligarch owner, Oleg Deripaska. These Russia sanctions have the effect of removing 6% the global supply of aluminum and have sent prices through the roof. Reuters reported this morning that Rusal is stockpiling huge quantities of unsold aluminum at its facilities in Siberia. Prices for a metric ton of aluminum on the London Metals Exchange have increased 28.2% since April 4, climbing from $1,978 to $2,537.

Some analysts think these sorts of price shocks will be temporary. This morning on Bloomberg TV, Lori Heinel, State Street Global Advisors, said, “Keep in mind that these are traded markets as well as fundamentally-driven markets. So it’s hard to distill what’s just driven by Rusal or some of the Russian sanctions, or other things of that nature versus the fundamentals. But we think that the fundamental backdrop is strong; we also think that the supply-demand dynamics have led to a higher price than is warranted by this stage in the economy and if anything, we’re seeing a leveling off in global growth in demand.”

On Wednesday, Alcoa Corp., the largest US aluminum producer, lifted its 2018 earnings expectations and saw its stock rise 4%: Alcoa called for a growing global deficit in the metal because of delays in Chinese plant expansions, and a giant plant in Brazil operates at a reduced rate. 

“Considerable uncertainty remains in the global supply chain due to multiple trade actions, sanctions, and supply disruptions,” wrote Alcoa in its earnings statement. 

Nickel prices jump on Russian sanction fears

Nickel, another industrial metal important in stainless steel (68% of global nickel), various alloys (10%), electroplating (9%), and other uses like batteries (4%), saw its prices swing wildly on the London Metals Exchange due to fears of similar Russian sanctions. Nornickel, the world’s second largest nickel producer, is 25% owned by Oleg Deripaska, whose aluminum company Rusal has been shut out of international markets. 

Today, 3 month nickel shot up to a three year high at $16,690 per metric ton on sanctions fears before retreating to $15,010 per metric ton. 

“The U.S. can’t afford to [sanction] Nornickel because they are so heavily reliant on its palladium. The question is how the situation will evolve if tensions tighten between Russia and the U.S., that’s what the market is currently playing,” Julius Baer analyst Carsten Menke told Reuters this morning. We should probably  not expect any long term effect on United States industrial production or freight markets from this transitory nickel panic.  

Stay up-to-date with the latest commentary and insights on FreightTech and the impact to the markets by subscribing.