Stick with the miners – this rebound is real

I went to a really interesting lunchtime meeting with a China expert earlier this week.

The discussion covered a lot of ground from China's political picture (potentially worrying) to the state of the banks (a mess, but can be handled it's hardly the first time China's banks have been in a state).

But the thing I was most interested in was the current commodity market rebound.

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Is the current rally the real thing? Or should we be taking any mining profits right now?

The reflation trade is here to stay

Why? It's partly about the banking system, infrastructure and supporting the Chinese economy. The country is pumping more money via loan guarantees, it amounts to about $750bn (7% of GDP) this year into big infrastructure projects, including the "One Belt One Road" new Silk Road project.

That lot will suck up a lot of raw materials.

More to the point, China's banking system would be helped a great deal by higher commodity prices. Lots of Chinese banks have made loans backed in some way by commodities or in commodity-related businesses. Reflating commodity prices helps to bail out the banking system, in much the same way as reflating the property market in the UK bailed out our own banking system.

A continuation of higher commodity prices should be good news for mining stocks. It may well store up trouble for a later date, of course, but in the meantime, central banks around the world will be happy enough to see their inflationary efforts aided by rising raw material prices.

So don't expect anyone to object. And if that means the US Federal Reserve keeping a close eye on the dollar to make sure it doesn't spring any nasty new strengthening surprises, then that's exactly what'll happen.

A reminder of the oil market's vulnerability to disruption

MoneyWeek

the likely impact of Saudi Arabia's plans for a future "beyond oil"

It's a very interesting piece, going into a fair bit of depth on the country's current succession issues, its "cold war" with Iran, and its much-touted plan to wean itself off its "addiction to oil". To cut a long story short, Matthew is sceptical.

Saudi Arabia has talked about plans to diversify in the past, but it hasn't amounted to anything so far. The real problem is that the country would need to relax its rigid social compact to make any genuine shift and that's not likely to happen. So Matthew reckons that, sooner or later, supply cuts will have to come and the oil price will have to head higher.

Yet it looks as though it might not be Saudi Arabia that makes the difference, but Canada.

The province of Alberta home to Canada's oil sands has been hit by a massive wildfire (around 40 square miles, apparently), which saw the entire city of Fort McMurray evacuated more than 80,000 people. (Thankfully, although 1,600 buildings have been destroyed, reports say no one has been killed or injured).

As Reuters reports, "major oil sands facilities were not in the path of the flames, but companies' efforts to help employees and evacuees and protect pipelines hit production". The fire has already knocked out 800,000 barrels a day of oil sands production and more than a million could be affected overall, reports Bloomberg. Oil prices both Brent and WTI rose by more than 2% yesterday in response.

Now, the Canadian cutbacks might not last for long. However, there are other signs of the market stabilising at a more fundamental level. Firstly, Iran has said that it will be happy to act in conjunction with oil cartel Opec once it is back up to pre-sanctions export levels which could be as soon as the next couple of months.

Secondly, the US Energy Information Administration reported this week that US crude output had fallen by 113,000 barrels a day (to around 8.8 million). "That's the biggest weekly drop since August 2015", noted Bloomberg.

That said, US crude inventories are still at record levels (or rather their highest level since 1929, at least). But the point is that companies and countries are clearly taking action to counter the glut and will continue to do so. Read Matthew's story to find out how you can play the rebound in the oil price.