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Wednesday, July 18th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Oil and Copper Divergence: Economic Weakness Ahead?

What a move over the weekend. The April crude oil contract reopened for trading on Monday evening, up 9% at $98. Libya is clearly no Egypt as the OPEC member causes much greater concern about the future price of oil. This is not a good sign for the US consumer who is already exhibiting signs of weakness early this year.

Merrill Lynch has previously stated that $120 oil is the “breaking point” for the US economy. Oil remains a great risk to the recovery. The fragile US consumer must divert $2.6B every week for every $1 rise in gasoline prices. If gasoline prices continue to surge towards $4 (a very high likelihood given current trends in the Middle East and seasonality), we are staring at a substantially weaker US consumer and cuts in GDP estimates in the back half of the year.

click to enlarge images

One distinct aspect of last night’s market action is the divergence between copper and oil prices. As oil surged almost 8% higher, copper dropped 1%. This is a clear sign that the rise in oil prices is causing fears of a global economic slow-down.

The risk of turmoil in the Middle East has the potential to have a very real impact on the global economy. Weak developed markets likely can’t handle a sustained shock from higher oil prices. Last night’s decline in copper prices appears to be reflecting this belief.

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