Commodity Crash Redux as 2016 Starts Out Worse Than Last Year

  • BCOM Index down more than 5%, most for date since at least `92
  • Commodities are trapped in `a vicious cycle,' Krosby says

Sure, 2015 was bad for commodities. So far, 2016 is even worse.

The Bloomberg Commodity Index, a measure of returns for 22 raw materials, has tumbled more than 5 percent in 2016. That’s the worst start to a year since the comparable data begins in 1992. Hedge funds are positioning for more losses, holding the biggest net-short bet across raw materials since at least 2006.

China’s slowing economy is partly to blame. The Asian country unexpectedly devalued its currency, fanning concern that growth will be worse than expected. The yuan move sparked global market turmoil and sent investors to the haven of the dollar, cutting the appeal of raw materials as a store of value. With most energy, agriculture and metal products plagued by excess supplies, prices retreated in 2015 for a record fifth straight year.

“We’re in a vicious cycle for commodities,” said Quincy M. Krosby, a market strategist at Prudential Financial Inc., which oversees about $1.2 trillion, said by telephone from Newark, New Jersey. “With the yuan depreciation, you’ve seen more dollar strength, which is negative for commodities. And underpinning all that is the idea that the economic background in China is worse off than people thought. There’s a lot of questions about what will happen with demand, and markets do not like uncertainty.”

The Bloomberg Commodity Index dropped on Tuesday to a record low of 74.0247. Crude oil dropped to the lowest since December 2003, and copper fell to its cheapest since 2009.

The decline for prices is dragging down commodity companies. Shares of Freeport-McMoRan Inc., the world’s biggest publicly traded copper producer, tumbled 20 percent on Monday, the biggest one-day loss since the data begins in 1995. The shares fell another 12 percent Tuesday. BHP Billiton Ltd., the world’s largest miner, is trading near the lowest in a decade in Australia. The S&P 500 Oil & Gas Exploration and Production Index fell as much as 3.6 percent Tuesday to the lowest since 2009. Chevron Corp. is down about 10 percent in 2016, its worst start since 1982.

Money managers are bracing for more bad news. A combined measure of net-short positions across 18 commodities reached 164,203 future and options contracts as of Jan. 5, the latest government data show. That’s the most bearish since the data begins in June 2006. The gauge turned negative for the first time ever in November.

One bright spot for investors is gold, which has been rising as the declines across commodities and increased volatility in global equity and currency markets sparked demand for the metal as a haven. Futures in New York are up 2.3 percent since the start of the year, rebounding from a five-year low reached in December.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE