In February, commodity prices generally advanced, with recovery also seen in
energy commodities as crude oil recovered due to talks about potential
coordination between major producing countries. Meanwhile, in non-energy
commodities, metals experienced a broad-based advance on improving market
sentiment, while agriculture prices were supported by a strong recovery in palm
oil. Precious metals saw their best performance since 2012 on higher demand of
safe assets.
Trends in selected commodity markets
Commodity market sentiment turned positive during the second half of the month,
helped by the Chinese yuan support through the People’s Bank of China, as well as
news of potential coordination among major oil suppliers. Further support was provided
by weakness in the US dollar, which generally declined on the expectation of a flatter
path for interest rate increases in the US as a result of market turmoil experienced
since the beginning of the year. This, in fact, translated into the best performance for
gold prices since 2012, as expectations for real interest rates in the medium and long
term were sharply reduced.
In agriculture, food prices were supported by a rally in vegetable oils, led by a jump in
palm oil prices due to drought in Southeast Asia, which has resulted in a large drop in
output and stocks in Malaysia – the word second largest producer – according to the
Malaysia Palm Oil Board. Nonetheless, the high stock levels of some grains and
oilseeds have prevented their price recovery, with forecasts by the US Department of
Agriculture of plentiful global stocks of wheat, corn and soybeans. Sugar prices were
highly volatile, coming in lower in the first half of the month on reports of greater output
in January from Brazil according to country’s Sugarcane Industry Association UNICA.
However, forecasts of a higher global deficit by the International Sugar Organization,
mainly due to lower expected output from India and Thailand, triggered a spike in
prices at the end of the month.
Metals showed the best performance among commodities, with price increases among
the majority of components, with the exception of nickel. The stabilization of the
Chinese yuan and further recovery in the property market, in which prices increased in
38 of the 70 largest cities in January according to the National Bureau of Statistics,
improved sentiment in the metals market. However, manufacturing prospects in
February continued to point to a contraction in Chinese activity, with a manufacturing
Purchasing Managers’ Index (PMI) reading of 48.0 versus 48.4 in January, which could
pressure prices in the near term. Meanwhile, the World Steel Association reported a
y-o-y drop of 7.1% in world steel output for the month of January; it also went down by
7.8% y-o-y in China, which translated into a price spike. Iron ore prices increased
despite lower steel output.
In the group of energy commodities, crude oil recovered on the expectation of
coordination among major suppliers, while output in the US was reportedly slowing.
Natural gas prices continued to retreat as adequate levels remain though the majority
of the winter season is over. Higher winter temperatures as a result of El Ni?o limited
demand in both the US and Europe. Moreover, contracts in Europe linked to the price
of oil also dropped. Inventories in the EU-28 were at 39.3 bcm at the end of February,
around 19% above the previous year’s figures, according to data from Gas
Infrastructure Europe.
Average energy prices in February increased by 1.8% m-o-m due to a 4.2% increase
in crude oil. Natural gas prices decreased in the US by 13.9% m-o-m, while average
prices in Europe declined by 8.4%.
Agricultural prices advanced due to a 1.8% increase in food, and 0.8% increase in
raw material (timber, cotton, rubber and tobacco). In contrast, beverage prices dropped
by 1.1%. Palm oil and soybean oil prices advanced by 12.9% and 4.3%, respectively.
Average base metal prices increased by 3.3%, with advances among all group
components. Copper and aluminium prices were up by 2.8% and 3.4%, respectively.
Average iron ore prices rebounded by 11.9%, in spite of lower steel output.
In the group of precious metals, gold prices experienced their best performance since
2012, with a 9.3% advance on safe assets demand, while silver prices advanced by
7.5% m-o-m.
In February, the Henry Hub natural gas index increased. The average price was down
32¢, or 13.9%, to $1.96 per million British thermal units (mmbtu) after trading at an
average of $2.27/mmbtu the previous month.
The US Energy Information Administration (EIA) said utilities withdrew 48 billion cubic
feet (bcf) of gas from storage during the week ending 29 January. This was above the
market expectation of a 40 bcf decrease; however it was significantly lower than the
previous five-year average of 137 bcf for that week. Total working gas in storage stood
at 2,536 bcf, or 45.6% higher than at the same time the previous year and 35.6%
higher than the previous five-year average. The EIA noted that temperatures during the
reported week were “significantly above normal”.
Investment flows into commodities
Open interest volume (OIV) increased in February for select US commodity markets
such as agriculture, crude oil, natural gas, livestock and precious metals, while it
decreased for copper. Meanwhile, monthly average speculative net length positions
increased for crude oil and precious metals, while decreasing for agriculture, natural
gas, copper and livestock.
Agriculture’s OIV increased by 2.6% to 5,062,233 contracts in February. Meanwhile,
money managers increased their combined net short positions to 220,854 lots, largely
because of decreasing net length in sugar.
Henry Hub’s natural gas OIV increased by 8.3% m-o-m to 987,046 contracts in
February. Money managers increased their net short positions by 65.4% to reach
220,854 lots on warmer weather during the month. Money managers’ sentiment is very
bearish ahead of the end of the winter season.
Copper’s OIV decreased by 1.5% m-o-m to 188,968 contracts in February. Money
managers cut their net short positions by 70% to 8,966 lots after following the rally
observed in industrial metals during the month.
Precious metals’ OIV advanced by 3.3% m-o-m to 582,040 contracts in February.
Money managers increased their net long positions by more than six times to
110,821 lots on safe assets demand.
