Oil and Copper Bubble Déjà Vu

China's commodity imports soar in December

But in a sign the volume of oil imports might not reflect real demand, the country, traditionally an importer of refined fuel, flipped to being a net seller as a 64 percent leap in exports outstripped a 39 percent rise in imports.

The glut of fuel could be set to increase -- trade sources have told Reuters that China has lined up more crude from Kuwait, Saudi Arabia and Iraq this year, and a Reuters poll found refiners planned to start the new year with record crude runs to embrace market optimism.

The question mark over 'real' demand for oil in a year of stockpiling and rampant production in China, has made it harder for traders and the government to judge the level of real economic activity.

Copper Hitting Goldman’s Target Year Early Means Drop (Update1)

“The easiest way to look at this now is to compare where copper prices were the last time inventories were this high,” said Ryan Atkinson, the chief market analyst at New York-based Balestra Capital Ltd., which oversees $1.1 billion. “We think copper belongs at about $2, given the fundamentals,” he said, meaning $4,409 a ton.

Back in 2004, copper was in the midst of a six-year rally that sent prices up more than four-fold by the end of 2007. It gained 37 percent in 2004 because supplies monitored by the London Metal Exchange, the world’s biggest metals bourse, were in the middle of an 89 percent plunge -- the biggest drop since at least 1971.

Today, stockpiles are heading up. Copper has climbed 52 percent since June 30 even as global inventories rose for six straight months. That’s the longest supply increase since 2008, when prices collapsed by a record 54 percent as the recession slashed demand. Stockpiles monitored by the Shanghai Futures Exchange more than quadrupled last year, a sign the country may have overbought in the aftermath of a 4 trillion yuan ($586 billion) stimulus program.

Copper: 5 Year Chart

Copper has fully recovered to its 2006-2008 average bubble level. I'll pass.

Ready yourself for a massive copper correction

The primary reason copper has enjoyed such an epic rally is because its price was driven so unbelievably low during the stock panic. These gains only make sense when considered through the lens of that panic’s impact on copper. In August 2008 before the stock panic hit, copper averaged $3.46 per pound. This week, it was finally back to $3.44. All 2009 did was counteract the crazy losses the panic spawned.

Despite this, copper is now way overextended technically and fundamentally. And the driving force behind its hyper-optimistic sentiment today, the levitating S&P 500 stock index (SPX), is growing tired and brittle. Given copper’s incredibly-strong correlation with the SPX since the stock markets’ March bottom, any material stock-market weakness will almost certainly spark a massive wave of copper selling.