Commodities suffered mixed fortunes this year, but such diversity means opportunities still prevail. Lynn Strongin Dodds reports.
“There has been significant weakness over the past six months and we are now sitting at a five-year low. We have not seen these levels since 2009 when the world was dealing with the collapse of Lehman.”
Ole Hansen
It may sound cliché but 2014 has been a commodity story of two halves. Hopes ran high in the first six months with the Bloomberg Commodity Index (BCOM) – formerly the UBS Dow Jones benchmark – delivering a 7%-plus hike, outstripping US equities, 10-year Treasuries and US corporate bonds. Pessimism returned in the third quarter with metals, grains and oil prices tumbling on spluttering global growth. Although this may present buying opportunities in certain sectors, timing the moves is difficult.
DOWNWARD TREND
This is particularly the case with the energy market which recently surprised market participants with the US benchmark crude oil dropping below $80 a barrel for the first time since June 2012. Base metals also took a beating, with nickel slumping to a sevenmonth low in London while soya beans in the agriculture sector continued its downward spiral, shedding 0.6% to $9.61 a bushel for November delivery.
Together these tumbling commodities pushed the BCOM down 0.2% in mid- October to 116.7791, the lowest point since July 14, 2009.
“There has been significant weakness over the past six months and we are now sitting at a five-year low,” says Ole Hansen, head of commodity strategy at Saxo Bank. “We have not seen these levels since 2009 when the world was dealing with the collapse of Lehman. It is a combination of things such as an increased supply at a time that demand growth is not as strong. China is going through a painful process of transforming from the world’s factory to a consumer- led economy which means less dependency on resources. However, Europe is also toying with recession while the strong dollar is also having an impact.”
Colin O’Shea, head of commodities at Hermes Investment Management adds: “We have definitely seen big differentials in returns with soya beans down 27% year to date while coffee is up 95%. The underlying micro-economics have been impacting the individual markets such as record US yields driving soya bean prices down while coffee rose off the back of poor weather in South America, particularly the drought in Brazil. However, now we are also seeing macro factors such as a slowdown in global growth which caused the International Energy Agency to revise forecasts downwards and predict oil demand will grow this year at the slowest pace since 2009.”
Since June crude has plunged over 26% and it is difficult to forecast when the oil price will find its floor despite the encroaching winter months. One of the main reasons is the Organisation of Petroleum Exporting Countries’ (OPEC), which produces about 40% of the world’s crude oil, reluctance to reduce supply. In fact, OPEC’s production hit a 13-month high in September with Saudi Arabia, which accounts for 30% of the groups’ output, leading the charge. The hope is that low prices will eventually lead to higher revenue in the medium term, by curbing new investment and further increases in supply from the US shale patch as well as ultra-deepwater drilling.
“There is a lot of conjecture as to whether Saudi Arabia will let prices fall even lower,” says O’Shea. “There is talk in the market that the price will have to be sub-80 and not between 80 to 90 before there is more common political will to cut production.”
Comments