Commodities Post Best Rally Since August as Citi Sees Gains

  • Silver leads advances as metal heads for bull market
  • `Virtually all commodities have stared at a price bottom'

Supply concerns are resurfacing for commodities from crude oil to soybeans, sparking the biggest rally for raw materials since August.

The Bloomberg Commodity Index, a measure of returns for 22 components, jumped percent 2.4 to 82.6543 on Tuesday, the biggest gain since Aug. 27. Oil in New York climbed as much as 4.4 percent, corn reached a six-month high and silver entered a bull market.

After five straight years of losses, commodity markets are rebounding as supply overhangs start to subside. Unfavorable weather is threatening soybean output in South America, while the start of a La Nina pattern this year could bring dry weather to U.S. grain-producing regions. Workers at Kuwait’s oil production facilities extended their strike for a third day over an unresolved pay dispute. Citigroup Inc. said this week that prospects for Chinese demand and a weaker dollar will also help prices to stabilize. The prospect of the Federal Reserve keeping U.S. interest rates low has lifted demand for raw materials as stores of value.

“It’s difficult to call a bottom, but it’s important to look at the positive fundamental factors that are driving prices higher -- the Fed backing up, the uptick in global growth and the oversold condition,” said Walter “Bucky” Hellwig, who helps manage $17 billion as senior vice president at BB&T Wealth Management in Birmingham, Alabama. “You’ve got a lot of situations falling in line.”

Rising Inflows

Investors have poured more than $17 billion into exchange-traded products linked to commodities since the start of the year, data compiled by Bloomberg show. Total assets under management for commodities has climbed to about $315 billion, the highest since May 2015, Citigroup analysts including Ed Morse and Aakash Doshi wrote in a report this week. The holdings should “rebound further” in the second half of the year, they said.

“There is growing evidence that virtually all commodities have stared at a price bottom and are groping for a return to normal,” the Citigroup analysts said.

The bank raised its 2016 forecasts for copper, zinc and aluminum, which have all rallied from multi-year lows. The analysts increased their prediction for West Texas Intermediate oil to $42 a barrel in 2016 from $39.

Oil in New York has climbed 11 percent since December, the best start to a year since 2011. The labor stoppage in Kuwait initially slashed daily output by as much as 1.7 million barrels. Prices have rebounded more than 50 percent since mid-February, when futures reached the lowest in more than 12 years. A tumbling dollar and signs of stabilizing for the global economy have brought investors back to energy. Futures closed at $41.08 a barrel on the New York Mercantile Exchange.

Silver Jumps

Silver futures for May delivery gained 4.4 percent to settle at $16.972 an ounce on the Comex in New York, after touching the highest since June. The closing price marked a more-than 20 percent gain from a recent low, meeting the common definition of a bull market.

Codelco’s biggest copper mine, El Teniente, has been down since Saturday as the state-owned producer clears roads and fixes transport infrastructure damaged in flooding in central Chile over the weekend. Futures advanced to the highest in three weeks in New York. State-owned Codelco is the world’s top producer of the metal.

“The bottom line today is we’re seeing a continuation of momentum based on some fundamental changes,” Hellwig said. “Plus, there was a lot of underinvestment in commodities.”

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