Commodities hit a 12-year-low

The big story again has been the falls in commodities with the Bloomberg Commodity Index (measuring 22 energy, agriculture and metal prices) hitting a new 12-year low.

Source: Bloomberg

Copper has hit a five-year low, with Deutsche Bank predicating consumption of copper will grow at the slowest pace since 2010. Other brokers such as Societe Generale believe refined copper production will exceed demand by 380,000 tons, more than double last year. Clearly this is seen front and centre in the price action.

However, once again it’s the falls in oil that have been most pronounced with US light crude and Brent printing a new lower low. If we focus on US light crude we have seen a low of $45.69 (at the time of writing) and everyone is asking whether we can we see $40 a barrel. If there is one thing we can take out of the moves since June it really has to be that following the trend has been the winning trade. Trying to pick a low in these markets has been painful and it’s still the biggest mystery as to what level OPEC will be simply too uncomfortable about prices.

Perhaps a bullish development has been that on Friday we saw a sizeable drop in the level of oil rigs in the US. This suggests that OPEC is gaining the upper hand in their battle to put US producers out of business. Judging by price action it doesn’t seem to have influenced the market too greatly!

An interesting piece of research that Goldman Sachs produced yesterday was that they revised its three- and six-month outlook for US light crude to $39 and $41 a barrel and Brent to $42 and $42 respectively. These calls (provided they play out) will not only have ramifications on inflation expectations, but also on capital spending plans. Goldman’s suggest that if the price of US light crude stays around $40 a barrel for a prolonged period CAPEX will remain subdued, with the marginal cost of production being $65. It’s worth highlighting that globally oil companies have set their estimate for oil prices to average $77.55, so there will be sizeable production cuts depending on how long oil stays at current levels.

Personally, I wouldn’t be long at present levels, even though the commodity is so under-loved and oversold. The term ‘catch a falling knife’ springs to mind, but below $40 there would have to be some much more compelling opportunities on the long side.


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