Commodities appear at higher risk of 2008- style pump-and-dump

This analysis is by Bloomberg Intelligence analyst Mike McGlone. It appeared first on the Bloomberg Terminal.

Commodities are at increasing risk this year of a wild ride akin to 2008, a development that may shine on gold. At about $100 a barrel at the end of April, crude oil is more likely to revert toward $50 a barrel than $150, we believe. The $50 is about the mean since the 2014 plunge and the U.S. cost of production, while $150 could entail global recession. Copper and industrial metals face similar reversion risks along with crude, particularly if the stock market continues to decline. If they don’t drop, the Federal Reserve is poised to be more aggressive vs. inflation.

Given production and yield uncertainties from the Russia­ Ukraine war, the most supply-elastic commodities, grains, are poised to outperform. We see 2H risks in broad commodities tilting toward reversion lower vs. sustaining gains.

Increasing commodity headwinds

Supply­ and demand-elastic commodities are typically more likely to revert following price spikes than equities, but they may have the upper hand given the Russia-Ukraine war and the Federal Reserve’s stance on inflation. Commodities and equities were about 70% above their 120-month moving averages on April 29. The Bloomberg Commodity Spot Index (BCOM) could have a momentum advantage vs. the S&P 500. What’s notable from our graphic is the BCOM-to-S&P 500 ratio may be bottoming from a historically low level.

Commodity-to-stock market ratio may have bottomed

Fueling an energy paradigm shift

Benchmark natural gas and West Texas Intermediate crude oil futures at the end of April are at about the same price as 14 years ago, and the forces that have kept them in check may be more enduring than the catalysts behind recent rallies. The U.S. has been a leader in harnessing technology that has capped prices, and we see those trends gaining momentum and motivation globally.

Industrial vs. precious metals, the fed

Gold bottomed in 2015 when the market began to anticipate a rate-hike endgame, and we see parallels in 2022. The precious metals’ price outlook appears straightforward to us — when the one-year-out fed funds future (FF13) bottoms, so should gold. The graphic shows that when fed funds futures reversed a similar downtrend as now, gold began the rally from about $1,000 an ounce to the high close of $2,063 in August 2020.

Agriculture endurance vs. backwardation

Russia’s invasion of Ukraine is ample reason for higher grain prices, but the uncertainty of lost exports and guidance from similar past extremes point to limited further upside and the potential for sharp retracements. Our graphic of the managed-money position in grain futures at about 22% of open interest shows net longs about as extended as the 2012 price peak. The early growing-season months — May through July — are known for price corrections, as premiums for the risk of reduced production often ease. In May 2021, the Bloomberg Grains Spot Subindex dropped about 4%.

2012 was the last time net longs as extended