In December, energy commodities saw sharp declines due to falling crude oil
prices, and the non-energy group also showed drops in both base metals and
agricultural commodities. On the other hand, precious metals recovered on the
perceived economic weakness in the Euro-zone.
Trends in selected commodity markets
During the month, the US dollar continued appreciating due to the strength of the
US economy relative to Japan and the Euro-zone, adding downward pressure to
commodities. The potential tightening of monetary policy in the US put pressure on
precious metals during 2H14, however, the perceived weakness of other major
developed economies supported some modest recoveries in their prices during the
month. Manufacturing prospects declined in the US (ISM PMI at 55.5 vs. 58.7 in
November) and China (PMI at 49.6 vs. 50.0 in November), were unchanged in Japan
(PMI at 52.0), and were slightly up in the Euro-zone (PMI at 50.6 vs. 50.1), adding
pressure to the group of metals.
Agricultural prices declined during the month as the US Department of Agriculture
(USDA) continued reporting global ample supplies, while weather conditions improved
in South America. Wheat provided some support to the group of grains, as new
sanitary regulations and export duty enacted by the Russian government could
potentially limit exports. Soy prices declined as the Brazilian crop was estimated to be
larger than previously expected due to improved weather conditions in the producing
regions. Corn prices were stable as ethanol prices in the US declined due to low oil
prices, but the USDA anticipates increased use of corn for feed in the European Union.
Base metals prices declined on weak manufacturing readings across major economies
and due to the drop in energy prices, which represents an important share of their cost.
Copper prices experienced their largest decline since March as China’s manufacturing
sector showed a deceleration, and new home prices declined, albeit at a slower pace
than in the previous month, according to the National Bureau of Statistics. Aluminium
prices experienced their steepest decline of the year following the fall in energy prices,
signalling lower production costs. Iron ore weakened at its lowest rate since May 2009
as major producing companies continued to add new capacity to displace higher cost
competitors.
Energy prices decreased due to a sharp drop in crude oil in an oversupplied market.
Natural gas hub prices also experienced declines in Europe and the US on mild
weather conditions. In Europe, underground inventories were at 75.85% of capacity at
the end of December, versus 68.53% a year before – according to data from Gas
Infrastructure Europe; in absolute terms, they are 17.5% larger than a year before. In
the US, mild weather conditions reduced demand for power generation and allowed for
steady gas production with the effect of decreased withdrawals from inventories.
Among developments that will require close monitoring are the impact of central bank
interventions in Japan and the Euro-zone, which could further weaken the US dollar in
the short term, and the impact of measures by the Chinese government to support the
housing market, which could provide support to metal prices. Further improvements in
weather conditions in the southern hemisphere could provide additional downward
pressure to some agricultural commodities.
Average energy prices decreased by 18.6% m-o-m in December due to a 21.2%
decrease m-o-m in crude oil as the sell-off accelerated during the month on continuing
oversupply and a strong US dollar. Natural gas prices also declined sharply in the US ?
on average by 16.3% m-o-m ? while average import prices increased in Europe by
10.4% during the month.
Agricultural prices decreased by 1.7% due to a 1.8% decrease in food, a 2.4%
decrease in beverages and a 0.9% drop in raw materials. Oil and fats prices dropped
with soybeans, soybean oil and soymeal, declining by 1.1%, 1.6% and 4.2%,
respectively, due to a better-than-expected crop in South America and lower demand
growth in China. Grains recovered during the month on the strength of wheat prices,
which increased by 4.2% due to potential export restrictions from Russia.
Base metals decreased by 4.6% m-o-m with declines among all group components
with the exception of nickel. Aluminium decreased by 7.1% m-o-m while copper
declined by 4.0% after the slide in energy prices and the slowdown in manufacturing in
China during the month. Iron ore prices declined by 8.1% due to an oversupplied
market.
Precious metals prices recovered by 2.1% in December. Average gold prices
increased by 2.1% m-o-m after showing significant volatility during the month on the
influence of divergent monetary policies across major developed economies. Silver
prices also recovered during the month to increase by 2.2%
In December, the Henry Hub natural gas price decreased after above-average
temperatures translated into smaller withdrawals from inventories. The average price
decreased by 67¢, or 16.3%, to $3.43 per million British thermal units (mmbtu), after
trading at an average of $4.1/mmbtu the previous month.
The US Energy Information Administration (EIA) said utilities withdrew 26 billion cubic
feet (Bcf) of gas from storage during the week ending 26 December, below market
expectation of a 38 Bcf decrease. Total gas in storage stood at 3,220 Bcf, which is
2.4% below the previous five-year average. Last month it was 9.8% below that
average.
Investment flows into commodities
The total open interest volume (OIV) in major US commodity markets decreased to
8.0 million contracts in December, with the OIV declining for crude oil by 1.0%,
agriculture by 3.7%, copper by 7.8%, precious metals by 12.5%, natural gas by 1.2%
and livestock by 7.2%.
Total net length speculative positions in select commodities increased by 9.6%
m-o-m to 818,510 contracts in December due to increases in net long positions on
crude oil, agriculture and precious metals, and declines in natural gas, livestock and
copper.
Agricultural OIV was down 3.7% m-o-m to 4,453,740 contracts in December.
Meanwhile, money manager net long positions in agriculture increased by 20.6% to
403,396 lots, continuing the upward momentum that started in October of 2014.
Henry Hub natural gas OIV decreased by 1.2% m-o-m to 939,338 contracts in
December. Money managers switched their stance to a net short position of 28,772 lots
in December as warmer-than-average temperatures in the US translated into small
storage withdrawals.
Copper OIV declined by 7.8% m-o-m to 155,099 contracts in December. Money
managers slightly increased their net short position to 5,022 versus 2,739 lots the
previous month.
Gold OIV decreased by 12.7% m-o-m to 372,876 contracts in December. Money
managers almost doubled their net length in gold to 84,074 lots on the potential delay
of interest rate hikes in the US due to weakness in other developed economies.
