Not With a Bang But a Whimper: How Commodities May End Year
(Bloomberg) -- For commodities, 2016 started with a bang. If history is any guide, it will end with a whimper.
The Bloomberg Commodity Index, tracking returns for 22 components, is heading for a third-quarter slump after posting consecutive gains in the first two periods. Since the data begins in 1991, that’s only happened in four other years -- and the final quarter was a loser for three of them.
With supply gluts persisting from corn to oil, traders are already gearing up for declines. Investors pulled $791 million out of exchange-traded funds tracking commodities over the past month, a reversal from earlier this year that have still left inflows up by $34.1 billion for the year. Hedge funds have cut their combined wagers on a rally for raw materials in nine of the past 11 weeks, and open interest across the asset class has fallen.
“There’s just not enough to keep speculators interested,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $133 billion. “There’s not been enough momentum or follow-through in any commodity price.”
The Bloomberg Commodity Index fell 6.7 percent since the end of June to 82.87 as of 10:34 a.m in New York on Friday. Losses included a 41 percent plunge for most-active hog futures and a 23 percent drop for soybean meal. Crude oil in New York lost 11 percent.
Over the past month, about $991 million was pulled from energy ETFs and $39 million from industrial metals. Precious metals saw $530 million of inflows, but that pace has slowed from earlier this year. Investors are retreating after raw materials had their best first half in eight years, outperforming Treasuries, the dollar, world equities and high yield and investment grade corporate bonds.
From Dec. 31 to June 30, prices were pulled higher by a 25 percent jump in gold prices and a similar advance in natural gas, the biggest components of the Bloomberg Commodity Index. Money piled into commodities on speculation that the Federal Reserve would be slow to raise U.S. interest rates, weakening the dollar and making commodities cheaper for holders of other currencies.
“What was unexpected was how quickly the bounce-back occurred in the beginning of the year,” said John Stephenson, the Toronto-based chief executive officer of Stephenson & Co. Capital Management, which oversees C$50 million ($38 million). “The second half of the year is a story of an inability or perceived inability for commodities to move much higher because you have some of the issues that you always did,” including excess supply, he said.
While precious metals remain among the top performers, copper and corn, the fifth- and sixth-largest members of the Bloomberg index, are dragging the measure lower. The U.S. Department of Agriculture predicts American farmers will harvest a record crop of the grain. Antofagasta Plc, a Chilean producer of the red metal, sees the glut lasting another two to three years.
Big supplies are also weighing on the crude market. West Texas Intermediate oil in September is heading for the third drop in fourth months. Price risks remain “to the downside” amid a lingering surplus, Jeff Currie, head of commodities research at Goldman Sachs Group Inc., said this week.
It’s not just overproduction that’s pressuring prices. Traders see a 50 percent chance that the Federal Reserve will raise interest rates by year-end, sparking advances for the dollar. U.S. central bankers are set to meet next week to assess policy, before convening again in November and December.
The prospect for higher rates means enthusiasm for gold is waning. Holdings in global ETFs backed by bullion have fallen by 6.8 metric tons in September to 2,014.6 tons, on pace for only the second monthly loss this year.
Even seasonality is going against commodities.
Since 2013, investors have made broad withdrawals in the second half of the year, Citigroup Inc. analysts including Aakash Doshi wrote in a Sept. 5 report. The driving boom that typically boosts gasoline demand during U.S. summer months ends in September. That’s the same month when natural gas inventories approach their peak, refinery maintenance curbs demand for crude and U.S. grain harvests add to supplies, according to Citigroup.
Even though inflows are slowing, it would take a “huge collapse” the rest of the year to swing investment flows to negative for 2016, according to Barclays Plc. Through August, commodities attracted $54 billion of inflows this year, the bank estimates. Still, half of that went to gold. Also, investors are allocating some money to funds that benefit when prices drop, especially in energy.
The cure for low prices may just be low prices. Declining profit means producers cutting investments in mines and oil rigs. When gluts do finally ease, it will spark a rebound, according to Cohen & Steers Capital Management Inc., which oversees $61 billion in assets, including raw materials.
For now, “demand is being overshadowed by the amount of supply that we have,” Nicholas Koutsoftas, who co-heads the commodities team at Cohen, said in an interview at Bloomberg headquarters in New York Tuesday. “We’re already seeing signs of the market re-balancing. It’s just going to to take more time before we see more sizable supply rationalization.”