Oil-Led Slump Spurring Fastest Investor Exit Since 2008

Investors are exiting commodities at the fastest pace in six years, betting a slump in prices isn’t over as corn, oil and gold drop close to their cost of production.

Open interest in raw-material futures and options is down 6.5 percent since June, heading for the biggest second-half slump since 2008, exchange data show. U.S. exchange-traded products tracking metals, energy and agriculture saw net withdrawals of $169.4 million in 2014, marking the first two-year slump since the funds were created a decade ago.

Commodities are under pressure from many sides. Collapsing oil prices are driving bearish sentiment because energy is used to produce or deliver almost everything, according to Societe Generale SA. Low inflation and higher interest rates create an “ugly scenario” for gold, says Bank of America Corp. And weaker currencies in countries that produce everything from soybeans to iron ore mean supplies will continue to climb, Goldman Sachs Group Inc. predicts.

“Now is not a time to be overweighting commodities,” Sameer Samana, a senior international strategist at Wells Fargo Advisors LLC in St. Louis, which oversees $1.4 trillion, said in a Dec. 17 telephone interview. “For now, the outlook is still negative. It wouldn’t surprise us to see prices go down even further. We wouldn’t be taking any tactical positions.”

Energy Leads

The Bloomberg Commodity Index of 22 products slumped 14 percent this year, heading for a fourth straight annual drop that will be the longest since the gauge’s inception in 1991. Brent crude tumbled 46 percent, the biggest loss among the raw materials, after trading below $60 a barrel this week for the first time in five years.

Crude, gasoline and heating oil led this year’s declines as an increase in U.S. drilling sparked a surge in output and a price war with producers in OPEC. About 65 percent of the $20 billion withdrawn from passive-commodities investment this year was driven by energy losses, Aakash Doshi, a Citigroup Inc. vice president, said in a Dec. 15 report.

Cheaper oil is reducing the cost of producing food and metals, increasing the likelihood for falling commodity prices, according to analysts at Societe Generale. At U.S. pumps, retail gasoline is down 33 percent since the end of June to an average of $2.477 a gallon, a five-year low, AAA data show. Global food costs tracked by the United Nations are the lowest since 2010.

Inflation Hedge

Reduced pressure on consumer prices is eroding the appeal of gold as an inflation hedge. Holdings in exchange-traded products backed by the metal fell 8.8 percent this year. Gold will slide to $1,100 an ounce next year, Francisco Blanch, Bank of America’s head of global commodity research, said in a phone interview Dec. 8. Futures traded at $1,194.80 today in New York.

Not all commodities may fall. Some industrial metals will rally in 2015, according to SocGen and JPMorgan Chase & Co.

Nickel will have the most upside, after Indonesia, the largest source of the metal from mines, imposed a ban on shipments of unprocessed ore earlier this year, said Jeffrey Currie, the head of commodity research at Goldman. Advances in industrial metals will more than make up for losses in agriculture and gold, helping commodities to generate “boring” returns of 2.5 percent in 2015, he said.

Increased stimulus can help to stabilize economies in Europe and China and sustain commodity demand, said Quincy Krosby, a market strategist based in Newark, New Jersey, at Prudential Financial Inc., which oversees $1 trillion in assets.

Extending Losses

This week, the Bloomberg Commodity Index reached a five-year low and is down 3.9 percent in December, the sixth straight monthly decline and the longest slump since 2009. Open interest for 24 raw materials fell 4.6 percent this year to 12.10 million contracts, snapping two straight years of gains, data compiled by Bloomberg show.

In China, the largest consumer of grains, energy and pork, the economic expansion next year will be the slowest since 1990, forecasts compiled by Bloomberg show.

A “sharp decline in agriculture” is Goldman’s strongest view for next year, Currie said in a telephone interview Dec. 9. The U.S. Department of Agriculture estimates rising world production will push soybean inventories to an all-time high, and prices are heading for the first two-year slump since 1999.

In Australia, iron-ore exports climbed to a record 64.95 million tons in October, as the Australian dollar weakened this year, the latest government figures show.

“Weakening currency is the real story here, whether you’re talking iron ore, soybeans, pretty much most of the non-energy commodities,” said Currie, who correctly predicted the bear market in gold. “As you continue to see a weakening of emerging-market currencies, they have an incentive to be producing more.”

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