The rally across a number of commodity sectors however resulted from a variety of factors, most of which are believed to be transient.
Some of the largest natural resource exporters with floating exchange rates have seen their currencies come under significant pressure over the past year.
Central banks may have foolish policies, but central bankers are no dummies.
As discussed earlier (see post), crude oil (particularly WTI) remains under pressure. As US economic activity slowed (see post), so did the demand for crude. This pushed up inventories to 5-year highs for this time of year.
The rise in crude inventories can be explained by the fact that US oil production is now 15% higher than it was a year ago, while refinery demand has declined to levels that are similar to last year’s. One can see the impact of the government shutdown in the chart below, as refineries cut production.
Moreover, with the Fed’s “taper” looming and the dollar seemingly stable, traders have sent crude prices lower. The weakness in the energy complex has spread to other sectors, pressuring the overall global commodity indices. For example, the CRB BLS Index (described here) is at this year’s lows.
And the DJ UBS Commodities Index is now at the lowest point since the summer of 2010.
|Dow Jones-UBS Commodity Index|
While energy remains the largest factor pushing commodity indices lower, demand weakness combined with strong production seems to be pressuring a number of other commodities sectors as well.
Bloomberg: – West Texas Intermediate fell below $95 a barrel for the first time since June. Gold reached a two-week low. Hog futures capped the longest slump in three months, and cotton slumped to the lowest since January.
Production is poised to top demand for everything from coffee to zinc as ample rains this year boosted global crops and demand waned for metals, grains and energy. U.S. crude inventories climbed to the highest since June, data from the Energy Information Administration showed Oct. 30. Commodity returns will be “mostly flat” in the next 12 months, and there are “significant downside opportunities” in gold, copper and soybeans, Goldman Sachs Group Inc. said Oct. 18.
Finally, adding to the softer valuations are some major commodities trading businesses going up for sale.
CNBC: – Facing lingering questions about the oversight and profitability of their businesses, Morgan Stanley and JPMorgan Chase have taken steps to sell their commodity divisions, say people familiar with the matter.
The firms are holding discussions with a range of offshore buyers who wouldn’t be subject to relatively stringent U.S. banking rules.
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The rally in commodities, which started in August has petered out. Several major commodities indices show significant declines on a year-over-year basis.CRB BLS Spot Cash (commodity) Index (source: Barchart)Dow Jones UBS Commodity IndexThere are s…
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As oil prices retreated from the refinery demand driven spike (see post), the CRB BLS Spot Index of 23 commodity markets (see description) hit a new low for the year. Per earlier discussion (see post), the equity markets have been discounting the rally in crude and so far have been proven right.
Although the rent on the stored aluminum – Goldman isn’t allowed to actually own the commodity – is just pennies a day, the vast amount of the metal it has stored in its 27 Detroit warehouses and the “warehouse shuffle” strategy that enables it to extend the rental period for months on end adds up.
Through the Metro International Trade Services subsidiary it bought in 2010, Goldman has accumulated 1.4 million tons of aluminum, which it stores at about 48 cents per ton per day. That’s about $672,000 per day of revenue – nearly half a billion a year.
Experts say the warehouse shuffle game ultimately raises the price of aluminum to manufacturers – everything from beer and soda companies to automakers. That extra cost, about $5 billion over the past three years, is passed on to consumers – you and me.
It was a challenging first half of the year for most commodities, with only two resources we track on our Periodic Table of Commodities Returns rising in value.
Natural gas and oil rose 6.5 percent and 5 percent, respectively, while silver lost a third of its value and gold lost a quarter of its price from the beginning of the year.