Commodities Update - Perfect Storm Spurs Broad-Based Sell-Off‏

It has been akin to a perfect storm for energy and metals this week. First of all, the USD index reached a six-month high after the FOMC revealed a varying set of views on how to exit from quantitative easing, see FOMC minutes: divergent views on QE, thus impairing risk appetite and weighing on dollar-denominated commodity prices. Currency war talks have taken a pause following last weekend’s G20 statement aimed at silencing countries complaining about their overvalued currencies. This has not least hurt gold as investors are now less concerned about currency debasement which usually benefits gold.

Second, on the demand side, China warned that it may be necessary to introduce curbs on the property market after a strong start to housing in early 2013. The Chinese authorities will most likely expand the current trial property tax in Shanghai and Chongqing to other cities and potentially introduce restrictions on mortgage lending. As the warning from the Chinese government reflects that the Chinese economy has strong momentum at present, the warning on housing does not change our view that GDP growth is poised to accelerate further through H1 13.

Third, on supplies, trackers of oil tankers suggest OPEC shipments rose over the past few weeks as producers start up again after the maintenance period, aiming at delivering oil to refiners ahead of the seasonal pick-up in demand over spring time.

Fourth, a US ruling said that BP’s Deepwater oil spill penalty could be cut as captured oil from leaking wells would be excluded from passing the fine on the company; this underlines that while oil companies face significant insurance premia and penalties for any leak resulting from offshore drilling, imposing unlimited liability on companies is not on the table after all. This should ensure that oil companies are not completely discouraged from going ahead with deepwater drilling which offers some of the best prospects (besides shale) outside of OPEC (notably in the form of Brazilian pre-salt in coming years and, eventually, also in the Arctic region).

Finally, the reported liquidation of long positions by a hedge fund in trouble helped to accelerate the sell-off in energy and metals. While we have already seen a significant correction lower in oil as we indeed warned about last week (see Commodities Update 15 February), we would not rule out a further correction. However, the Iranian nuclear programme, which the International Atomic Energy Agency (IAEA) says has seen extensive activity lately, remains a potential catalyst for oil price spikes in the near term.

Agriculturals have been a slightly different story: the grains complex has recently been supported by the continued lack of precipitation in the US and dry weather in Argentina. However, at its annual outlook forum, the US Department of Agriculture (USDA) predicted that prices for the two major US crops – soybean and corn – will come down around 25-35% this year as the agency looks for acreages of the two to rise steeply this year due to elevated prices ahead of the planting season. However, USDA projections assume ‘normal’ weather and last year’s experience with the US drought impairing the harvest highlights the fragility of markets as extreme weather becomes more common.

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