A Tale of Two Gluts: Oil and Ore Cross $50 on Opposite Paths – by Eddie Van Der Walt (Bloomberg News – May 26, 2016)


Crude oil and iron ore are two of the world’s most important industrial commodities, where supply and demand are tied to the fate of the global economy. Yet, they’re doing very different things right now.

Oil traded above $50 a barrel for the first time this year while iron, moving in the opposite direction, fell below $50 a ton on Thursday. It’s a slightly artificial comparison — there’s little physical equivalence between a barrel of oil and a ton of ore — but their differing paths tell us something about how the aftermath of the global commodities crash is playing out in different industries.

While both commodities have been plagued by overproduction, the glut looks to be ending in oil as unprofitable fields are shut and companies cut investments, according to forecasters from the International Energy Agency to Goldman Sachs Group Inc.

In iron ore, where many big miners are still making money despite the slump, analysts at Capital Economics Ltd. and Saxo Bank A/S say prices may have further to drop as more low-cost production comes on stream.

“Overproduction in iron ore is not likely to go away, oil is much more balanced,” Ole Hansen, head of commodity strategy at Saxo Bank, said by e-mail. “Oil will eventually move higher. In iron ore, most of the new supply coming online have production costs well below current levels, which leaves a strong incentive to continue producing.”

For the rest of this article, click here: http://www.bloomberg.com/news/articles/2016-05-26/a-tale-of-two-gluts-oil-and-ore-approach-50-on-opposite-paths