Oil, coal, iron ore prices at pre-2008 crisis levels, more downside expected

Tumbling oil, coal and iron ore prices are now all at levels last seen during or before the financial crisis of 2008/2009, signalling not only the impact of a glut of supplies but deeper weakness in parts of the global economy, analysts say.

The raw materials are among the most sensitive to economic health, with oil and coal the world’s two most important energy sources and iron ore used to make steel.

Brent crude prices have almost halved since June to slightly above $60 a barrel, a level last seen in early 2009 during the financial crisis. In the coal market, the benchmark European futures contracts has dropped below $70 a tonne to levels comparable before the boom and bust of 2007-2009.

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Iron ore prices have halved to under $69 a tonne as demand growth in the biggest market, China, wanes.

Analysts initially pointed to rising oil and mining output, as well as energy efficiency and alternative sources such as renewables, as the main factors behind the drops.

But with no end to the price slide, it became apparent that a significant cooling of emerging economies as well as ongoing slack in developed markets such as Europe and Japan was also at play, especially after oil producer club OPEC said it would not cut output in support of prices.

“Softer global demand, coupled with unprecedented growth in supply are weighing on global oil indices, with prices falling to levels not seen since the Global Financial Crisis,” National Australia Bank said in a note on Monday.

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“Headwinds to global growth should come from weakness across Japan, the Euro-zone and Latin America,” it added.

Morgan Stanley also pointed to China as an explanation for falling prices: “Our economic team’s lower Chinese and global growth estimates… also prompted us to temper our demand outlook,” the bank said.

OIL DROPPED LAST

On the demand side, oil prices are driven heavily by events in major economies such as the United States, China or the European Union.

While Europe’s economies have yet to recover from the credit crunch of 2008/2009, growth in the United States and China had picked up, helping to stabilize oil prices.

But this year China’s economy has shown signs of cooling, and with the ongoing slack in Europe and Japan, as well as rising output especially in North America, oil started to fall in June.

While the rout in oil markets is relatively recent, coal and iron ore have been caught in downward trends since 2011, but it was early this year that analysts first pointed towards weakness in emerging markets as well as rising mining output.

Coal is closely linked to industrialization of emerging economies, being the cheapest fuel for electricity, and emerging market growth has been slowing since 2013.

Iron ore is seen as a key gauge of the economy in Chinese , which is by far the world’s biggest steel producer.

WEAK TECHNICALS

Beyond fundamentals, analysts say the technical outlook for oil and coal is also weak, especially should support at $60 a barrel and $70 a tonne be broken.

“Brent oil may fall more to $54.21 per barrel over the next four weeks,” said Thomson Reuters technical market analyst Wang Tao.

“European API2 2015 coal futures may break a support at $69.60 and then fall more towards $65.90 per tonne over the next two months,” he added.

Reuters