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Commodity Markets - December 2016

Source: OPEC_RP161204 12/14/2016, Location: Europe

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In November, average energy commodity prices declined, led by lower crude oil prices. In the group of non-energy commodities, base metal prices experienced a broad-based advance on continuing expansion in global manufacturing and the expectation of higher infrastructure investment in the US, and agricultural prices increased on average, led by vegetable oils and oilseeds. Gold prices declined on a firming outlook for interest rate increases in the US.

Trends in selected commodity markets
During the month, interest rate expectations increased due to further confirmation of a rebound of US GDP in 3Q16 as well as the expectation of higher infrastructure investment by the upcoming administration. This has translated into appreciation of the US dollar and a sharp decline in gold prices. Meanwhile, an improving global manufacturing picture as shown by a JPM global manufacturing PMI at 52.1 versus 52.0 during the previous month, together with the aforementioned expectations of stimulus plans in the US, gave support to the largest jump in base metal prices in the last six years.

Agricultural prices found support in the group of vegetable oils and oil seeds. Palm oil increased due to a smaller-than-expected reported output – down 2.2% m-o-m and 17.5% y-o-y in Malaysia in October, as reported by the Malaysian Palm Oil Association. Support also came from a rally in soy oil following a higher-than-expected biofuels mandate in the US. This also gave some support to soybeans, in spite of forecasts for higher global end-of-season inventories, due to increased output by the US Department of Agriculture (USDA). Meanwhile, the USDA also increased its forecasts in relation to end-of-season stocks for maize, wheat and rice. Sugar prices declined by around 8% as a higher proportion of the sugarcane output of Brazil was used for sugar production – 46.8%, versus 41.7% the previous year, according to the Brazilian Sugarcane Industry Association ? as the recent rally in sugar prices and the depreciation of the Brazilian real during the month increased the attractiveness of sugar over ethanol production.

Metal prices showed their best performance since 2009 on the aforementioned strong performance of global manufacturing, especially in China, where the manufacturing PMI was at 50.9 in November, versus 51.2 the previous month, showing a slight deceleration, though still expanding. Further support to metals came from the expectation of higher infrastructure investment by the new US Administration. Copper prices jumped by 15.2%, its largest jump in six years, also supported by a large drop in inventories in the LME system. Meanwhile, iron ore prices jumped by 24% due to continuing increases in steel output, which was up in October by 3.3% worldwide and by 4.0% in China, according to the World Steel Association.

In the group of energy commodities, crude oil declined during the month due to higher supplies, while uncertainty about the outcome of the OPEC meeting also weighed on prices. Natural gas prices declined in the US due to warmer-than-average temperatures during the month, but have jumped quickly since the beginning of December on a colder weather outlook. Meanwhile, prices advanced in Europe, mainly due to colder weather. EU-28 inventories, as reported by Gas Infrastructure Europe, were around 81% full at the end of December, versus 78.7% a year ago. Coal prices rose by 7.3%, and have almost doubled since April, mainly due to decreasing output in China, which, this year, has dropped by 10.7% in the first ten months of the year.

Average energy prices in October decreased by 6.7% m-o-m, led by an 8.2% decrease in average crude oil prices and a 15.2% decrease in natural gas prices m-o-m in the US. On the contrary, the average natural gas prices in Europe advanced by 14.4%, while Australian benchmark thermal coal prices advanced by 7.3%.

Agricultural prices increased by 0.4%, with a 0.3% increase in the average food prices and a 1.4% advance in raw material prices, while, at the same time, beverage prices declined by 0.9%. Among commodities that were up in prices, palm oil and natural rubber rose by 5.4% and 12.3%, respectively. Among decliners, sugar and cocoa prices were down by 8.7% and 7.8%, respectively.

Average base metal prices increased by 9.9%, the largest advance in six years, with all group components rising. Copper, aluminum and nickel prices were up by 15.2%, 4.3% and 8.5%, respectively. Average iron ore prices were up by 23.7%.

In the group of precious metals, gold prices declined by 2.2% on average, but the decline was exacerbated with the US election, as expectations for higher interest rates in the US increased significantly. Meanwhile, silver prices declined by 1.4%.

In November, the Henry Hub natural gas index declined sharply. The average price was down 45¢, or 15.2%, to $2.50 per million British thermal units (mmbtu) after trading at an average of $2.95/mmbtu the previous month.

The US Energy Information Administration (EIA) said utilities withdrew 50 billion cubic feet (bcf) of gas to storage during the week ending 25 November. This was below median analysts’ expectations of a withdrawal of around 53 bcf. Total working gas in storage stood at 3,995 bcf, or 0.6%, higher than that at the same time the previous year and 6.3% higher than the previous five-year average. The EIA noted that temperatures during the reported week averaged lower than in the previous week, although they were higher than normal throughout the Lower 48 States.

Investment flows into commodities
Open interest (OI) increased in November for selected US commodity markets such as crude oil, natural gas, copper, livestock and agriculture, while decreasing for precious metals. Meanwhile, in monthly terms, speculative net length positions increased for agriculture, copper and livestock, while declining for crude oil, natural gas and precious metals.

Agriculture’s OI increased by 0.7% to 5,089,938 contracts in November. Meanwhile, money managers increased net long positions by 21.7% to 418,457 lots, largely because of increasing net length in the soy complex and corn.

Henry Hub’s natural gas OI increased by 2.1% m-o-m to 1,165,905 contracts in November. Money managers decreased their net length positions by 68.3% to 39,937 lots on warmer-than-normal temperatures during the month.

Copper’s OI increased by 15.8% m-o-m to 197,230 contracts in November. Money managers changed their stance to a net long position of 64,761 contracts on improving global manufacturing and a further drop in copper inventories in the LME system.

Precious metals’ OI decreased by 7.3% m-o-m to 656,393 contracts in November. Money managers decreased their net long positions by 7.3% to 188,543 lots.

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