Commodity Rally May Falter on Supply, Speculators

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30 Jun 2009

Commodities, heading for the first quarterly advance in a year, may struggle to repeat their gains in the next three months as supply expands and speculators sell. Nickel may average 29 percent less in the third quarter than now, crude oil 16 percent, copper 14 percent and gasoline 10 percent, analyst estimates compiled by Bloomberg show. Hedge funds and speculators cut their bets on higher prices by 23 percent in the two weeks ended June 23, the first back-to-back drop since March, based on an index using U.S. Commodity Futures Trading Commission data. The World Bank said June 22 the global recession will be deeper than it expected three months ago.
“Commodities have gotten a little ahead of themselves,” said Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. “As long as there’s uncertainty about growth, that’s going to be headwind commodities won’t be able to overcome.”
Commodities rose 14 percent this quarter, led by nickel, oil and sugar, after three consecutive declines, according to the Reuters/Jefferies CRB Index of 19 raw materials. This year’s 57 percent advance in oil costs, combined with widening budget deficits, may cause another global slump, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis.
The World Bank forecast for this year’s economic contraction to be 2.9 percent, rather than the 1.7 percent decline previously anticipated, may curb sales just as producers expand output in anticipation that the worst is over.
Russian Steelmaker
Evraz Group SA, Russia’s second-biggest steelmaker, said June 22 it restarted a blast furnace and Trimet Aluminium AG, Germany’s largest maker of the metal, began raising output in May. China’s aluminum industry, the world’s biggest, is starting or reopening 2.1 million metric tons of annual capacity, equal to about three weeks of demand, according to Barclays Capital.
The Organization of Petroleum Exporting Countries, accounting for 40 percent of world supply, raised output by a cumulative 485,000 barrels a day in April and May, the first gains since July 2008, Bloomberg estimates show. The increase comes as the International Energy Agency, a Paris-based adviser to 28 nations, expects consumption worldwide to contract by 2.9 percent from last year, the biggest drop since 1981.
Nickel output rose for two consecutive months through April to 109,400 tons, the most since December, according to the Lisbon-based International Nickel Study Group. Daily average aluminum production expanded in April and May, to 95,400 tons, the International Aluminium Institute in London reported.
Lead Mines
Lead mines extracted more metal in March and April, taking monthly output to 300,000 tons, the most since December, the International Lead & Zinc Study Group said. Zinc mines increased production to 890,900 tons in April, also the most since December, the Lisbon-based group reported.
Lead, aluminum and tin stockpiles in warehouses monitored by the London Metal Exchange rose at least 88 percent this year.
Centrica Plc, the U.K.’s biggest energy supplier, has a record amount of natural gas in its Rough storage site for this time of year. Heating oil in independent storage in the Amsterdam-Rotterdam-Antwerp area rose 27 percent this year to 2.72 million tons, according to PJK International BV.
“We expect commodity prices to come off in the short run, in the next two or three months,” Francisco Blanch, head of global commodity research at Merrill Lynch & Co., said in an interview from Sydney. “Oil and some of the metals markets will start to suffer because of large inventory accumulation.”
Prices Rallied
Expanding stockpiles may not be enough to stop prices from climbing higher. U.S. crude-oil inventories are 8.7 percent higher than in January, according to the Department of Energy. As the supplies gained, prices rallied 57 percent this year to $69.90 a barrel on the New York Mercantile Exchange.
Oil will decline to an average $58 a barrel in the third quarter, while gasoline drops to $1.681 a gallon, according to analyst forecasts compiled by Bloomberg. Copper will fall to $4,354 a ton on the London Metal Exchange as nickel averages $11,250 a ton, the forecasts show.
Energy “markets have shown us in the past that prices are capable of rallying even with high inventories,” said Daniel Masters, a portfolio manager at the $288 million Global Commodity Systematic fund. “The market rallied on the prospect that future captive capacity would be insufficient, and that’s still true today.”
Soros Assessment
Billionaire hedge fund manager George Soros on June 20 told Polish television station TVN24 that the worst of the global financial crisis is over. The crisis, which started with the collapse of the U.S. subprime-mortgage market in 2007, has led to more than $1.47 trillion of writedowns and credit losses at financial institutions, according to data compiled by Bloomberg.
The Organization for Economic Cooperation and Development in Paris raised its forecast for the economy of its 30 member nations for the first time in two years on June 24. The economy of the world’s most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010, the group said. That compares with March projections for contractions of 4.3 percent and 0.1 percent.
Hedge funds and other large speculators are holding a net 653,915 contracts betting on higher prices, according to an index of combined positions in 20 commodities tracked by the U.S. Commodity Futures Trading Commission. Their net long position reached 854,743 contracts earlier this month, from as few as 86,220 in December.
Excess Froth
“Some of the run-up was money that had been laying on the sidelines and poured into the market without looking at the fundamentals and that’s the froth that’s got to come out,” said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset Management in Cincinnati. “We could see the commodities lose about a third of the gain they’ve had in this run up.”
The CRB index rose as much as 33 percent from March 2, giving up some gains since June 11 to be now 25 percent higher. The 82-company Bloomberg World Mining Index, which plunged 61 percent last year, rebounded 41 percent this year.
Europe’s manufacturing and service industries were still contracting this month, according to a survey of purchasing managers by Markit Economics. The euro-area economy may shrink about 4.6 percent this year and about 0.3 percent in 2010, the European Central Bank forecasts.
Deutsche Bank AG Chief Operating Officer Hermann-Josef Lamberti said on June 18 that the market is still in “the eye of the storm” as the credit crisis affects the economy.
“Commodities will likely tread sideways from now unless there is some substantial data of economic recovery,” said Pierre Montezin, a fund manager at Zurich-based Plenum Investments Ltd., which manages $170 million. “In the short term, I’d position for a correction.”

Source: Bloomberg