The commodity rally has paused. What’s next for oil, copper and producer stocks.

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As oil and copper prices rallied for a hot second last month, those gains tumbled. The next significant moves could come soon, with significant consequences for producer stocks, as several macroeconomic developments unfold.

West Texas Intermediate crude oil, the price benchmark in the US market, gained 8% from around $67 a barrel in early June to just over $72 in the second half of the month. Copper rose almost 10% from $3.56 per pound at the end of May to $3.91 at the end of June.

Everything that raised the

SPDR Energy Select Sector Fund

(ticker: XLE) 7% to around $82 from late May to early June, while the SPDR S&P Metals & Mining ETF (

XME

) gained 15% to around $51 between late May and early July.

The gains came as investors believed the Federal Reserve would soon end the aggressive streak of interest rate hikes it rolled out early last year as China’s economy recovers from the damage caused by the prolonged lockdowns imposed by Beijing during the pandemic. Both of these changes would mean faster economic growth and increased demand for raw materials.

Now the market fears that conditions will become less favorable. Both commodities have been flat since hitting those mini-highs, with oil at around $72, while copper is trading at around $3.77.

Buyers are hesitant, at least in part, because they fear the Fed may have to raise rates more than previously expected. Labor demand, while slowing, continues to grow, with the potential for rising wages. At the same time, rate hikes already in place continue to work their way through the economy, as monetary policy tightening typically takes full effect with a lag. Moreover, demand in China has not yet fully returned.

For oil, “fundamentals are tilting in favor of the bears as the onset of a recession would quickly see the resilience of consumer demand dissipate,” wrote Sevens Report’s Tom Essaye. The same is true for copper.

At this stage, the market awaits macroeconomic developments. One point to watch is the success of the Chinese government’s efforts to revive growth. While Beijing has already lowered interest rates, and the Wall Street Journal reported last month that authorities are considering issuing about one trillion yuan, or about $140 billion, of debt to help indebted local governments and build business confidence.

Another focal point is the Fed. Next week, June inflation data will be released and investors are watching to see if the annual increase in the consumer price index falls below 4%, the May result. A slowdown in inflation would give the Fed less incentive to raise rates, which in turn would support demand and cyclical commodity prices.

For oil in particular, the decisions of the Organization of the Petroleum Exporting Countries are also essential. Prices in the futures market reflect concerns about demand, although the physical market looks more or less balanced. Producers would benefit. OPEC cuts production to drive up prices.

Definitive news on any of these fronts could move commodities and stocks quite decisively one way or the other. Price action could signal the direction things are headed.

For oil, the mid-60s area per barrel is key. If the price holds there, that means buyers are coming in, which could mean that oil could be heading uptrend, helping to boost oil inventories. The key level at which copper needs to hold steady is the $3.60 low, which would make the metal and miner stocks attractive.

Copper stocks could rise faster than energy stocks, which would benefit holders of companies such as

Freeport-McMoRan

(FCX), as oil stocks have already made a much bigger rebound from the lows reached during the pandemic.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com