On Bull-Market Brink, Citi Sees Commodity Gains as Goldman JeersBy and
Flows into global commodity ETFs reach $18.5 billion this year
`Doesn't really make sense' to be bearish, Citi's Wilson says
Commodity bulls, it might finally be time to exhale.
There’s a growing chorus of voices and a surge of investor money signaling the worst of the commodity slump is over. Leading the pack is Citigroup Inc., the bank that was ahead of the game back in 2012 when analysts declared the end of the super cycle of rising demand and prices. Now, the bank expects a weaker dollar and China’s stabilizing economy mean most markets have reached their bottoms.
Raw materials are on the brink of a bull market, after five straight years of price declines fueled by slowing Chinese demand and global surpluses for most metals, grains and energy products. Not everyone expects the dark clouds to lift. Goldman Sachs Group Inc. sees no “sustainable shift in fundamentals” and says higher U.S. interest rates will keep the outlook bearish. But hedge funds remain optimistic. Their combined bets on a rally are the highest since 2014.
“It is more likely than not that we’ve seen a bottom in the commodity market as a whole,” said Fiona Boal, director of commodity research at Fulcrum Asset Management in London, which oversees about $4 billion. “And maybe more importantly, we’ve seen the start of some of the big supply responses that were needed following periods of low prices,” which is forcing cuts at mines, farms and oil fields, she said.
The Bloomberg Commodity Index, a measure of returns for 22 items, has risen as much as 17 percent from a record closing low on Jan. 20. A gain of 20 percent would meet the common definition of a bull market. Soybeans, gold, silver, crude oil and coffee have crossed that threshold in recent months. The index surged 8.5 percent in April, the biggest monthly advance since 2010.
Investors have poured $18.5 billion into global exchange-traded funds backed by raw materials this year, data compiled by Bloomberg show. Assets invested in commodity hedge funds, ETFs and passive indexes have reached $315 billion, the highest since May 2015, Citigroup said in an April report.
The end of the rout would be welcome news to producers including Exxon Mobil Corp., Freeport-McMoRan Inc. and Glencore Plc. As supply cuts start to take hold, the global gluts that plagued commodities from crude oil to zinc are starting to subside. Markets may rebalance by the end of the year, BP Plc Chief Executive Officer Bob Dudley said last week. Echoing the positive outlook was industry veteran Tom Albanese, chief executive officer of mine owner Vedanta Ltd. and a former head of Rio Tinto Group, who said last week that recovering Chinese demand means the worst is over.
Energy companies responded to the lowest oil prices since 2003 by cutting spending on exploration and developing new fields. The number of active U.S. oil rigs fell to 332 last week, the least since November 2009, according to Baker Hughes Inc. U.S. crude output has steadily declined since mid-2015, government data show. Oil futures tumbled from about $108 a barrel in 2014 to almost $26 in February, and then rallied last week to $46.78, a five-month high.
Supplies of copper are also tightening. Combined stockpiles monitored by exchanges in London, Shanghai and New York shrank 15 percent from a peak in March.
For crops, flooding in Argentina and Uruguay has cut the South American soybean harvest, further eroding global output that will be 6.6 million metric tons lower than forecast last month, Oil World said in a report e-mailed May 3. Drought in Brazil has threatened production of corn, while global sugar supply is expected to fall short of demand after dry weather in India and Thailand curbed output.
Goldman’s bearish outlook hinges in part on expectations that the Fed will raise interest rates three times this year, compared with Citigroup’s expectations for two increases, at most. Higher borrowing costs will lead to a stronger dollar, putting downward pressure on gold and copper, Goldman said in a report April 22.
Recent commodity gains have been driven by short-term, transient supply adjustments that don’t solve longer-term surpluses, particularly in oil and steel, Goldman said. The bank forecasts West Texas Intermediate crude oil will drop to $40 in three months, before rebounding to $60 in the next 12 months. Futures traded at $44.84 a barrel Thursday on the New York Mercantile Exchange.
Morgan Stanley analysts including Adam Longson are also negative on energy, saying in an April 25 report that “a macro unwind could cause severe selling” with the fundamentals worsening for oil. Iraq’s exports approached a record high in April, while U.S. inventories are at the highest since 1929.
For now, investors are betting with Citigroup. Since mid-March, hedge funds and other money managers have more than tripled their combined net-long holdings across 18 commodities to 1.09 million futures and options contracts, U.S. government data show.
“The flow of investor money back into commodities has happened much more quickly than we thought it would,” David Wilson, a London-based analyst at Citigroup, said in a telephone interview April 25. “Instead of just short-covering, you’ve seen it move on to the long side as well, partly on the fact that China is stimulating somewhat. Can you still be over-bearish commodities? It doesn’t really make sense.”
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