Since hitting bottom at $42 last summer, West Texas Intermediate (WTI) oil has staged an impressive comeback to trade in the $60-$75 band. Even more impressive is that it is pulling away from almost all other major commodities. Bearing in mind that oil is an input, high oil prices could eventually lift the tide for the commodity universe or get dragged down by the rest. How long can this uptrend last?
In commodity markets, one always has to remember the second-order effect—all the headlines of conflicts, outages, and natural disasters matter, but only to the extent of how they affect the underlying trends in supply and demand.
Commodities have end-users, so when the fundamentals exert themselves, especially on the margin, minor events can create shocks. When sentiment runs ahead of fundamentals, even minor positive news is exaggerated; when sentiment sours, every minor piece of bad news brings intense selling pressure.