The oil price is recovering. Low oil prices are a cure for low oil prices. This is because energy is the foundation of economic activity. Cheap energy is great, but the principle of the ‘greedy algorithm’ where grabbing as much as you can is the way to prosper means it can’t stay extremely cheap for very long.

The read through is that this rally in oil should mean a rally in other natural resources. You might look at gold and say, oil up means gold up means other commodities to follow. This may well be true of soft commodities where energy inputs are key but it’s a trap when it comes to hard commodities such as copper and other metals. Oil and metals are different.

The metal cycle goes boom and bust like the other commodities but the bust is much longer. The last commodity bust for metals took a whole generation to turn around. This is because there is a cycle that is acute for hard commodities that takes a very long time to play out.

The argument goes that as prices fall the producer needs to produce more to cover costs and gets into a death spiral where producers produce more and more of the commodity until the price collapse is so complete that production continues below cost until only the closure of broad sections of output causes a tightening of supply.

For hard commodities this life cycle is much longer than for oil, so that while oil can recover its cost of production, metals will continue to be in oversupply for much longer and be more prone to the vicious circle of cannibalization.

To read the full story, visit http://www.forbes.com/sites/investor/2016/05/23/commodities-prices-will-remain-low-for-some-time-heres-why/#30c0425b3f6f.

Sponsor