The Implications of Reaching Peak Oil

What you'll read in this issue:

• The impact peak oil could have on crude oil markets
• Gold is defying traditional market correlations
• Why global investors turn to safe haven currencies
• Copper’s recent rally to record highs
• Are corn and ethanol markets correlated?

TOP STORY

What the Peak Oil Debate Means for Crude Oil Markets

The debate over when peak oil consumption will be reached is a pivotal issue for crude oil markets, with significant implications for traders.?

Background: Peak oil is a theoretical concept that refers to the point in time when the global production of oil reaches its maximum rate, after which production will gradually decline. The idea observes that oil must be a finite resource and predicts that the extraction rate from known reserves will eventually peak and diminish.

Opposite Views: The International Energy Agency (IEA) and Organization of the Petroleum Exporting Countries (OPEC) have divergent views on when peak oil consumption may occur. The IEA expects peak oil consumption to be reached by 2030, while OPEC forecasts a longer timeline. They have also presented contrasting forecasts for oil demand in the upcoming years.

• The IEA predicts slowing demand growth, driven by a shift towards renewable energy sources and increased efficiency in energy use.
• OPEC maintains a more bullish outlook, expecting demand to continue rising through 2024 and 2025 based on sustained economic growth in developing countries, where oil remains a primary energy source.

Market Sentiment: Recent trends in CME Group WTI futures and options reveal a complex mix of optimism and caution. Shorter-dated options contracts are experiencing record volumes as more traders look to manage this short-term supply and demand uncertainty.?

Why It Matters: Reaching peak oil would likely have profound implications for crude oil markets, with the potential for price volatility, supply constraints, investment shifts and policy and regulation changes. Staying informed will be crucial for traders looking to capitalize on opportunities and mitigate risks in a volatile market.?

? Read more about why traders are using shorter dated options to manage crude oil risk .

FEATURED TOPIC

Gold is Defying Dollar, Equities, Interest Rates

Gold continues to hit new highs as an increasingly uncertain world has more people turning to the safe haven asset.

Background: Gold is rallying despite economic conditions that should cause it to lag: equity-market strength, a muscular U.S. dollar and reduced expectations for any rate cuts soon from the Federal Reserve. In addition to its safe haven status, strong demand out of Asia and in the over-the-counter markets is helping lift prices to all-time highs.

Physical Gold: The response from some market participants has fueled increased transactions of physical gold. Costco Wholesale started carrying 1-ounce gold bars on occasion and said in its quarterly earnings that the bars would often sell out quickly after listing online. In China, Millennials and Gen Z are snapping up gold in the form of “gold beans,” pea-sized gold pieces weighing about a gram, making it affordable.

Why It Matters: The new, post-pandemic era has brought an unprecedented amount of uncertainty that has made bullion increasingly attractive. Futures market participants are also increasingly active amid higher volatility:

• CME Group Gold futures volume in 2024 was up 7% versus the same timeframe in 2023.
• As of late May, year-to-date average daily trading volume (ADV) for Micro Gold futures was up 43% compared to a year earlier, and sitting at its highest ADV since inception.

? Read more about the continued demand for gold amid ongoing uncertainty .

INSIGHTS

Understanding the Role of Safe Haven Currencies

Safe haven currencies can be an important component in a global investors' toolbox, particularly during periods of high market volatility or geopolitical uncertainty.

Background: Investors expect a safe haven currency to retain or increase in value during times of market turmoil, making it a desirable option for those looking for less risky assets. Traditional safe haven currencies include the U.S. dollar, Swiss franc and Japanese yen.

Key Characteristics: Investors often seek countries with political stability, economic strength, financial depth and a low inflation rate when looking for a safe haven currency. For example, Switzerland's long standing policy of political neutrality and fiscal prudence contribute to its status as a safe haven.

Why It Matters: By including safe haven currencies in a portfolio, investors can diversify their holdings, thereby spreading risk and potentially reducing overall portfolio volatility. With their stability and reliability, safe-haven currencies can provide shelter for capital, potentially maintaining value when other assets may be declining.

? Read more about why investors use safe haven currencies .

Behind Copper’s Record Rally

Copper is currently the only industrial metal trading near record highs.

Background: Normally, copper prices follow the prices of other industrial metals, the pace of growth in China and the price of oil. Recently, however, copper parted company with all three:

• Copper is reaching highs, while aluminum and steel prices are 20% lower than they were two years ago, and lithium and cobalt prices are down by anywhere from two thirds to three quarters from their records.
• While Chinese growth has slumped to its slowest since early 2020, copper prices have broken $5 per pound for the first time ever.?
• Since October 2022, copper prices have been diverging from oil, rallying even as oil sags.

Tech Uses: In October 2022, the U.S. Congress passed the Inflation Reduction Act, which provided over $60 billion for EV recharging stations and other copper-intensive improvements to the electric grid. The advent of generative AI has also boosted copper demand in data centers.

Quotable: “This new demand for copper has collided with extremely slow growing mining output, which has trailed that of just about every other ferrous and base metal,” says Erik Norland, CME Group Chief Economist. “When demand rises and supplies don’t, the usual result is higher prices.”

? Read more about copper’s path to record highs .

Corn and Ethanol’s Complex Relationship

Higher decarbonization targets have seen biofuels regaining interest from governments as they seek to further reduce carbon emissions from traditional fossil fuels. Corn is the primary input to ethanol production in the U.S., while ethanol production accounts for about 35% of domestic disappearance of corn.

Positive Correlation: Though closely correlated, corn and ethanol markets respond to unique supply and demand dynamics. Animal feed, exports and processed food ingredients also put demand-side pressure on corn, while weather, planting sentiment and yield push corn supply. Ethanol demand, conversely, is driven by policy, notably in the form of the EPA Renewable Fuel Standard, and supply is dependent on production capacity.?

Less-Than-Perfect: One reason why Corn and Ethanol futures do not move in tandem is a difference in listing cycles between the two derivative products:?

• Corn futures, a physically delivered product, are listed to expire in March, May, July, September and December, with the latter month denoting the new crop instrument.?
• Ethanol is financially settled and listed monthly – with a highly storable downstream underlying product, Ethanol futures demonstrate seasonality distinct from Corn futures.?

Why It Matters: Rising demand for Ethanol has shown a positive effect on Ethanol futures volumes at CME Group with the Chicago and European contracts seeing steep gains. While the strong positive correlation between Corn and Ethanol futures prices offers valuable insights for hedging, it is essential to recognize the nuances of each market and the factors that contribute to independent price movements.?

? Read more about the correlation between Corn and Ethanol futures prices and the demand for ethanol .

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