Commodity Markets - Oct 13

Trends in selected commodity markets
Commodity prices have remained relatively flat over the last weeks, after volatile trading in the past months. Following a sharp decline in the first four months of the year, commodity prices have recovered by almost 10% on average from April to August, while in September prices have remained mostly unchanged for most commodities. It seems that currently commodity prices are range-bound amid some recovery in the developed economies, while emerging and developing economies have faced a slow-down in most of the first half of the year. China – as the most important marginal player in commodity demand – has shown signs of a moderate pick-up from its sub-potential growth. This should provide some support for current commodity price levels. However, the most recent uncertainty on US fiscal issues but also the ongoing weakness in some of the major emerging economies have highlighted that the undergoing economic recovery remains fragile.

The price behaviour in September among commodities has varied as has been the case in the past months. Particularly base metals have declined in September and gold showed some re-emerging weakness in the second half of the month, while agricultural products have been almost flat and energy prices slightly positive, on average. The once again increasing demand from China might turn out to be supportive for most of the major commodities.

While the government shut-down in the US had only a limited impact on the price performance of commodities, the outcome on the discussion on the raising of the debtceiling might have a much larger effect. Moreover, this comes at a time, when the uncertainty about the Federal Reserve Board’s (Fed) strategy on how to pursue its extraordinary monetary supply measure has increased. These US-centred decisions are of great importance for future commodity prices as cheap interest rates and ample availability of monetary supply from particularly the US, but also other major central banks of developed economies, have been a vital support factor for the commodity price development in the past years. Over the past months, the market has, to some extent, digested the possibility of a reduction of monetary stimulus in the US, however any unforeseen development on raising the debt ceiling in the US and its spill-over into the financial markets could lead to a major repercussion on the commodity markets. Other topics to watch, that will influence the near-term price development, will be commodity supply growth and the economic development of the major emerging economies, mainly China.

Energy prices, which have risen by around 15% to August since the trough in mid- April, have hardly changed in the past weeks ? with the exception of natural gas ? after geo-political concerns are fading and temporary supply disruptions have been overcome recently. While precious metals have also recovered since the beginning of July, they started retreating at the end of September and the likelihood of a continued recovery in the US, plus rising interest rates, should make them less attractive in the coming months. In the very short term however, they could turn out as a safe haven investment and remain supported by the current uncertainty about raising the debt ceiling in the US.

While energy prices in September rose a marginal 0.6% for the third consecutive month, after 2.2% m-o-m in August and 4.4% m-o-m in July, the natural gas price has recovered significantly, following a decline for three consecutive months. Natural gas fell by more than 5.0% m-o-m in August and July, and rose by 5.5% in September. The agricultural sector declined only slightly by 0.1% in September, after falling by 2.2% the previous month. Base metal prices declined by 1.2%, after increasing by 4.2% m-o-m a month earlier. In precious metals, gold declined by 0.2%, while silver increased by 3.1%.

In September, the Henry Hub (HH) natural gas price index ended higher for the first time in four months by 5.5%, backed by rising nuclear plant outages and bullish inventory expectations. Prices have been underpinned earlier in the month by seasonal maintenance at some of the nuclear plants that have shifted demand to gas. Gas-fired units are typically used to make up any lost generation when nuclear plants shut. Nevertheless, late in the month, US natural gas futures front-month contract posted a five-week low amid a bearish weekly inventory report, mild weather outlook and no serious storm threats to Gulf of Mexico gas supplies. The contract also posted a fractional loss in the third quarter, but is still up a significant 45% so far this year, compared to the same period in the previous year.

Investment flows into commodities
The total open interest volume (OIV) in major commodity markets in the US decreased slightly by almost 1% m-o-m to 8.7 million (mn) contracts in September. All major commodities’ OIV dropped marginally, except that of livestock and crude oil, where the OIV increased by 0.8% and 2.5%, respectively. The remaining commodities’ OIV decreased in the range of 0.7% to 7.38 mn lots over the month.

Total net length speculative positions in commodities increased sharply by almost 30% m-o-m to 707,865 contracts in September, adding to the previous month’s 10% gains. This was mainly driven by significant bullish speculative sentiments in agriculture, natural gas, precious metals and gold. Money managers’ activities in copper and crude oil reflected deep bearish sentiments in these markets, particularly towards the end of the month.

Agricultural OIV dropped slightly by 0.7% m-o-m to 4,189,171 contracts in September. However, money managers’ net long positions in agriculture increased sharply by over 145% to 244,125 lots. The bullish move took place as futures markets rallied to record highs while the sugar harvest Brazil began its seasonal slow-down and was additionally hindered by rains. Crop weather and possible crop disease concern in the top cocoa grower raised production worries, causing some analysts to increase their global deficit forecasts for the 2013/14 crop year starting 1 October.

Henry Hub natural gas’ OIV decreased again by 3.4% m-o-m to 1,311,375 contracts in September. Money managers flipped their previous month’s net short positions of 18,377 lots to stand at net longs of 786 lots, an increase of over 104% amid five consecutive weeks of bullish bets on higher natural gas prices. That was driven by increased demand due to seasonal maintenance at some nuclear plants.

Copper’s OIV decreased 7.4% m-o-m, for the third month in a row to 148,740 contracts in September. The group of investors reduced net long positions by 1,967 contracts to 2,928 lots, a hefty 40% drop. Speculators slashed net longs as consensus indicated that the Fed Open Market Committee could announce a plan to begin slashing its $85 billion monthly bond purchase programme.

Gold’s OIV decreased by 1.3% m-o-m to 383,889 contracts in September. However, hedge funds and money managers continue to raise bullish bets in US gold by 35% m-o-m to 64,743 lots, the highest level in several months, as a spike in geopolitical tensions triggered safe-haven buying. A possible US government shutdown also provided support.