Trends in selected commodity markets
After it had become apparent in the first half of the year that emerging economies in
particular are slowing down, commodity prices started declining on a relatively broad
base already in March and April. At that time, it was also clear that the inflationary
development was further easing and an inflationary hedge for investors via
investments into commodities was not attractive or necessary anymore, triggering
paper money to be taken out of this asset class. Moreover in May, the Fed has
highlighted the possibility of reducing its extraordinary monetary supply measures —
dubbed QE3 — of $85 billion per month. Also, the GDP growth in the 1Q of developed
economies has been relatively weak, putting additional burden on commodity demand.
Since mid-April, and particularly since June, commodity prices have recovered up to
the end of the 3Q, when confidence increased about a recovery in developed
economies and a turnaround of the deceleration in China and Brazil became obvious.
Since then, however, until beginning of November and on average, commodity prices
have again retreated back to around the relatively lower April/May levels. The reasons
for the again increased weakness are manifold. One influence is the again sharply
declining inflation, which in the Euro-zone now stands at only 0.7% y-o-y in September
and at 1.2% y-o-y for the US. Another factor has been the rising US dollar, which might
continue rising and hence influence prices negatively. China’s regaining momentum,
however, should put a floor to the decline and with the expectation of a rebound in
India next year, prices are not expected to decline much further. Also, the possible
tapering of the Fed is forecast to be gradual and, hence, most of the negative impact
from the paper market — in anticipation of the tapering — should have been digested
already. On the other side, the supply situation will also need to be taken into account.
While supply of agricultural products has been very supportive for coping with the
demand situation and keeping prices declining throughout the year, the supply
situation in industrial metals and also bulk commodities is forecast to keep prices from
rising significantly in the short- to the medium-terms.
While commodity prices have been largely driven by the monetary easing of the major
developed economies, it had less of an influence lately, probably due to the expected
reduction of this policy in the US. The Fed foresees, to some extent at least, that a
continuation of the pick-up in the economy will cause a reduction in its monetary
stimulus efforts. It seems that investors have followed this expectation by reducing
exposure to the commodity market already, while consequently remaining supportive
on equity markets. This decoupling of equity markets and the commodity sector
became obvious around February this year.
In October, the price behaviour among commodities has been different from what has
been the case in the past months. Energy prices in particular have declined in October
and precious metals were also showing some continued weakness, while agricultural
products have remained almost flat and base metals increased on average. With a
continued recovery in the major developing economies, as well as a stabilisation of the
economy in China and an expected rebound in India, demand for major commodities
should turn out to be supportive in the near future.
While energy prices in October have declined by 2.5% on average, coal has risen by
2.3%, rebounding from a relatively lower level in September. Also, natural gas
continued recovering and rose by 1.7%, after falling by more than 5.0% m-o-m in
August. The agricultural and food sector was showing a solid performance with the
exception of soybean oil, which fell by 3.6% m-o-m, while the total sector’s
performance stood at a 0.2% m-o-m increase. Base metal prices increased by
1.6% m-o-m after declining by 1.5% m-o-m in September. The strongest rise came
from aluminium, which rose by 3.0% m-o-m in October. In the precious metals
group, the decline continued. Gold fell by 2.4% m-o-m in October after a decline of
0.2% in September, while silver fell by 2.9% m-o-m in October compared to a rise of
3.1% in September.
In October, the Henry Hub (HH) natural gas price index ended slightly higher
underpinned by some technical buying despite a bearish backdrop of high production,
fading weather and above normal storage. The index ended up 6¢, or 1.7%, to stand
at $3.67/mbtu, after trading at an average of $3.61/mbtu in the previous month. With
stockpiles at comfortable levels and production flowing at a record high pace, many
traders remain sceptical of any upside, at least until some sustained cold kicks up
demand. Meanwhile, the gas storage build increased the deficit relative to last year by
28 bcf to 120 bcf, or 3.1% below last year's record highs at that time. It trimmed 19 bcf
from the surplus versus the five-year average, leaving stocks 58 bcf, or 1.6%, above
that benchmark. EIA data showed that gross gas production hit a record high in
August, climbing to 74.82 bcf per day. Output in August was running about 2.3 bcf per
day, or 3.1%, above the same month last year.
Investment flows into commodities
The total open interest volume (OIV) in major commodity markets in the US increased
by around 1% m-o-m to 8.8 million contracts in October. Agriculture OIV showed an
expansion of 4.4% while that of copper increased by 1.5%. The OIV of energy indices
crude oil and natural gas dropped by 3.6% and 3.7%, respectively. The remaining
commodities OIV grew by less than 1%.
Total net length speculative positions in commodities increased sharply again by
almost 22% m-o-m to 864,794 contracts in October, adding to the previous month 30%
gains. This was mainly driven by significant bullish speculative sentiments in
Agriculture, copper, livestock and precious metals. Money managers’ activities in
natural gas and crude oil reflected deep bearish sentiments in these markets due to a
supply overhang.
Agricultural OIV was up 4.4% m-o-m to 4,373,834 contracts in October. Meanwhile,
money managers’ net long positions in agricultural increased sharply by over 56% to
381,069 lots in October. Speculators raised their net long position in raw sugar and
cocoa futures and options on ICE futures to their highest since records were first
published seven years ago. The bullish move comes four weeks after speculators
shifted to a net long position after maintaining a year-long net short position, and as
the futures market extended its rally to a nine-month high on weather concerns in top
grower Brazil.
Henry Hub natural gas’s OIV decreased again by 3.7% m-o-m to 1,262,549 contracts
in October. Money managers flipped their previous month net long positions of 786 lots
to stand at net short positions of 6,239 lots, a decrease of close to 900% amid three
consecutive weeks of bearish bets on lower natural gas prices. That was driven by
mild weather, high inventory and high production.
Copper’s OIV increase 1.5% m-o-m, to 151,036 contracts in October, for the first time
in three months. The group of investors increased net length positions by
6,101 contracts to 9,029 contracts, a hefty 210% uplift. Speculators added net longs as
the Fed kept its $85 billion monthly bond purchase program.
Gold’s OIV decreased by near 1% m-o-m to 380,764 contracts in October. However,
hedge funds and money managers continue to raise bullish bets in US gold by another
5% m-o-m to 68,146 contracts, which is the highest level in several months.
According to data from CFTC, the dollar investment flow into commodities declined a
1.5% m-o-m to $103.20 billion in September. Except for copper, all commodities
considered posted an outflow of investment in September.
