Brent keeps benefiting from QE3 announcement, base metals outperform the rest of commodities

On Friday, Brent further profited from Thursday’s FOMC decision and in intraday trading even hit 118 USD per barrel level (USD/bbl), i.e. 4-1/2 month high. Moreover, the price of oil might have been supported by anti-western demonstrations in some Middle East/North Africa countries as well as by Israel’s calls for adoption of ‘red lines’ (which, if crossed, might trigger a military response) for Iran over its nuclear program.

However, we think that recent gains might be, from the perspective of fundamentals, slightly overdone. Recall that broader macroeconomic picture does not support recent rally. China – worlds’ top consumer of both metals (accounts for around 40 percent of total consumption) shows signs of further decline in economic activity (recall that China’s PMI hit the lowest level since March 2009 in August). Moreover, the situation in the market remains rather calm – the spread between spot and three month contacts on copper (LME ) hit the lowest level since mid February and thus indicate rather low demand for the physical metal. As for aluminium, despite the fact that the global output was seen little changed in July in comparison with year ago, the stocks of the metal remain well above medium term average. Therefore, we’d be cautious to bet on a sustainable rally in prices of both metals.