Commodities Crumble, Showing Limit to Once-Unstoppable Rally

(Bloomberg) -- Energy and commodities futures swooned under the weight of inflation fears and concerns about the resilience of Chinese demand, raising doubts about the prospects for a much-vaunted commodity “supercycle.”

Oil, copper, soybeans and almost every other futures contract linked to industrial and agricultural staples retreated on Wednesday amid a broader market meltdown afflicting everything from cryptos to equities.

The stark downturn comes just weeks after luminaries from major investment banks and trading houses such as Goldman Sachs Group Inc., Citigroup Inc. and Trafigura Group boldly forecast the dawn of a new era of booming raw material markets.

The specter of an inflationary contagion is heightening concern that central bankers will curb monetary stimulus, knocking out on the key pillars of a rally that drove commodities to a nine-year high last week. Traders also were spooked by comments from China’s chief administrative panel calling for tougher oversight of commodity markets and protecting consumers from soaring prices.

“Concerns about higher inflation that could threaten or even derail the recovery of the global economy seem to have gained the upper hand today,” said Daniel Briesemann, an analyst at Commerzbank AG. “This has led to higher risk aversion among market participants as can also be seen by falling stock markets.”

Hedge Funds

The surge in raw materials costs has had far-reaching impacts as consumers were socked with higher grocery bills and homebuilders struggled to manage sky-high lumber prices. Sanderson Farms Inc., the third-largest chicken producer in the U.S., may shelve plans to build a new processing plant in response to elevated prices for steel and other building materials.

Investors will be closely scanning minutes from U.S. Federal Reserve deliberations at 2 p.m. Eastern time for clues on the outlook for any anti-inflationary measures.

Even before Wednesday’s sell off, money managers had dialed back bets on rising commodity prices for the first time in over a month, according to the latest Commodity Futures Trading Commission and Intercontinental Exchange data on 20 raw materials compiled by Bloomberg.

Crude fell as much as 5.4% in New York, the steepest intraday decline in more than six weeks. Swelling U.S. stockpiles added to concerns that Iran may soon pour more crude onto global markets as part of a revived nuclear deal.

Industrial Metals

Meanwhile, copper dipped, leading a decline among industrial metals. Copper for three-month delivery on the London Metal Exchange fell as much as 4.1% to $9977.50 a ton, the most since March 4. Other LME metals also dropped, with zinc declining from its highest close in nearly three years.

See how other commodities traded:

• Natural gas futures fell as much as 2.4% on the New York Mercantile Exchange as traders shed bullish bets ahead of a key U.S. government tally of stored supples scheduled for release on Thursday
• Wheat fell as much as 3.8% to the lowest in almost a month on the Chicago Board of Trade as better weather forecasts improved prospects for bumper crops in the U.S. and Europe
• Gasoline declined 4.3% in New York

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