Investors Dump Commodities as Supercycle Call Meets Skepticism

Net bullish wagers on rising commodity prices fell to the lowest since December last week, raising questions about the commodity supercycle.

Money managers are trimming what had been the largest wager for rising commodity prices in at least a decade as stumbling economic reopening efforts force a reconsideration of the popular recovery trade. A recent bond rout raised worries over inflation and surging bulk shipping rates are seen capping any further upswing.

There’s a sense that “we have yet to get rid of the coronavirus, with rising cases and extended lockdowns delaying the expected growth sprint,” said Ole Hansen, head of commodities research at Saxo Bank. “The surge in Treasury yields, a stronger dollar and worries that China may tighten liquidity in order to curb inflation are also contributing factors.”

Hedge funds’ net bullish positions on a basket of 20 commodities have decreased for six weeks in a row, according to the latest Commodities Futures Trade Commission and ICE data compiled by Bloomberg. That comes after money managers boosted the figure to the highest in data going back to 2011, while prices in the Bloomberg Commodity Spot Index rose to nearly the highest in eight years in February.

Investors Dump Commodities as Supercycle Call Meets Skepticism

Commodities had seen a resurgence in interest early this year as major investment banks flagged the start of a new structural bull cycle -- with some even calling for a supercycle comparable to ones that peaked in the 1970s and early 2000s.

The idea was that raw materials would benefit as the world emerged from the pandemic and fiscal stimulus programs would sustain a downtrend in the U.S. dollar, thereby making commodities priced in the greenback more attractive. While a return to normal is anticipated, hiccups in recent months surrounding economic reopening plans are clouding the near-term outlook. Meanwhile, the dollar came back from its lows this year alongside rising bond yields.

In the last week, investor outflows were most pronounced for oil, with funds weighing whether demand will be strong enough to absorb returning supply in coming months. OPEC and its allies decided earlier this month to gradually ease unprecedented output curbs from May to July, while further out, the market may see more Iranian supply come back if it returns to a nuclear deal.

Adding further pressure, volatility-targeted funds like commodity trading advisers underwent “widespread deleveraging” after global benchmark Brent futures’ briefly jumped above $71 a barrel following an attack on Saudi oil facilities in March, Ryan Fitzmaurice, commodities strategist at Rabobank, said in a note Friday.

Now, a squeeze on vessels to carry some commodities around the world is adding another risk for investors to consider. The cost of shipping unpacked commodities like grains and iron ore, known as dry bulk, is up more than 50% this year.

The move up in shipping costs “makes it more expensive to move things around, which goes contrary to the idea of a supercycle,” Eddie Tofpik, head of technical analysis and senior markets analyst at ADM Investor Services International Ltd., said at an online event last month.

Still, calls remain for commodities to continue their price rebound this year after this period of consolidation.

“Commodities remain the best performing asset class of 2021,” Goldman Sachs Group Inc. analysts wrote in a report Friday. “We view this consolidation as nothing more than a fleeting speed bump created by logistical bottlenecks in vaccine roll-outs.”

©2021 Bloomberg L.P.

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