Commodities aiming to end 5-year streak of annual declines
Halfway through the year, commodities are enjoying a broad advance and are on track to break a five-year streak of annual losses.
Analysts said the climb is likely to continue through the end of the year, but some don’t expect the second-half rally to be quite as impressive as the gains seen over the last six months.
Upside moves this year have been led by sugar SBV6,-3.09% and lean hogs LHQ6, -0.09% with futures prices for crude CLQ6, -2.11% LCOU6, -2.26% and gold GCQ6,-0.52% also rebounding sharply after big declines over the past two years or more. Cattle LCQ6, +0.77% FCQ6, +0.44% and coal QLQ6, +0.00% meanwhile, are among the biggest decliners.
Commodities are likely to continue to perform well through the next several months, said Adam Koos, president of Libertas Wealth Management Group
“Commodities have been a laggard asset class for so long, it was just a matter of time before we’d see them in first place again,” he said. “I think that time has come and it’s early yet, so investors shouldn’t feel as if they’ve missed the party.”
The moves mark a turnaround for an asset class that ended 2015 with its largest yearly loss since 2008.
The Bloomberg Commodity Index BCOM, -0.74% a broadly diversified commodity-price index, has climbed about 13% year to date. It lost nearly 25% in 2015, marking a fifth-straight yearly decline.
Year to date as of Wednesday, sugar climbed 39.6%, lean logs gained 39.4% and Brent crude advanced 37.3%, according to data from FactSet, tracking the most-active futures contracts. WTI oil added 34.2% and gold trades 26.9% higher. The worst performers include live cattle LCQ6, +0.77% which has lost 16.5% this year.
“Recent times have been challenging for commodities markets and we may have seen most areas reach their bottom level for this cycle,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
That said, he doesn’t see a reason to be “overly bullish” about the rest of the year for the commodities market.
News last week that the U.K. voted to leave the European Union has made prices particularly volatile in recent days, with oil cutting down gains for the year, as gold added to them.
Here’s a review of the moves for key commodities and where they may be headed next:
Hogs and cattle play opposites
Lean-hog and live-cattle futures are on opposite sides the performance spectrum.
A shortage of pork supplies and a subsequent price spike in China contributed to the rally for lean-hog futures.
Hog numbers and pork production, however, are “expected to expand this summer from the spring by the largest amount for the period since 2009, which suggest the near-term upside may be limited,” said David Maloni, president of the American Restaurant Association Inc.
Meanwhile, live cattle futures have led the declines in major commodities. The fall comes after significant price gains from 2010 though 2014 provided producers incentive to boost cattle numbers.
“Cattle supplies have improved due to better forage conditions and historically-elevated cattle prices over the last few years,” Maloni said.
A strong U.S. dollar DXY, +0.17% earlier this year also priced U.S. beef out of the world market.
But recent weakness in the greenback could help buoy demand for U.S. beef, and Australian exports are likely to slow down “sharply this year” as strong sales to China in the past two years have drawn down supplies, said Ned Schmidt, editor of the Agri-Food Value View report.
After big declines over the past two years, the rebound in oil prices is a welcome sight for some producers.
West Texas Intermediate and Brent crude are among the big gainers so far this year, as a more than 30% drop last year for both helped make it unprofitable for many U.S. shale producers to pump oil, said Fawad Razaqzada, chief technical analyst at Forex.com. “The rally found further support form unscheduled production outages, strong demand and a weaker U.S. dollar.”
The heating oil rally is particularly impressive. Phil Flynn, senior market analyst at Price Futures Group, said heating oil is a “proxy fuel.”
“The movement higher reflects the fact the some of the doomsday scenarios for China and the global economy has not played out. On top of that, demand has been stronger,” he said.
Looking ahead, Razaqzada expects non-U. S. oil supplies to remain high as production comes back online from regions, such as Canada, that had unscheduled outages, and as Iran continues to increase its market share.
But oil prices should continue to find some support with U.S. crude supply likely to fall further in the second half of the year and a probable push back in the timing of a Federal Reserve interest-rate hike expected to keep pressure on the dollar, said Razaqzada.
He’s also skeptical the U.K.’s potential exit from the EU will cause “a major economic catastrophe which could materially impact demand for oil.”
After posting losses over the past three years, gold futures have climbed by nearly 27% year to date. Prices got an added boost to a nearly two-year high in the wake of the Brexit news.
Under the best-case scenario, Chintan Karnani, chief market analyst at Insignia Consultants, said gold can rise to about $1,560 by the end of the year. Futures prices settled at $1,326.90 on Wednesday.
“Gold can cross $1,500 this year, but I have my doubts” whether it will be able to hold above $1,500 for long, Karnani said. If the “dollar gains substantially and expectations of another bull run in stock markets rise, then gold prices can fall to $1,176.”
The likely influences for gold in the second half of the year include safe-haven demand due to the U.K. exit from the EU, the jobs scene and interest rates in the U.S., and Asian demand, Karnani said.
Industrial commodity ‘laggards’
With economic uncertainty, coal and copper HGU6, -0.46%haven’t fared that well this year.
Coal futures have lost nearly 11% year to date, while copper’s 2.4% gain was among the smallest for major commodities.
“Copper and coal have remained laggards,” even as their industrial counterparts such as silver and iron ore, have “bucked the trend and found sunlight this year,” said Libertas Wealth Management Group’s Koos.
“There are too many regulations pounding coal into the ground and copper is pretty dependent upon industrial success both here and overseas in the Euro-Pacific region, which has obviously shown more signs of weakness over the last 12 months than it’s shown strength,” he said.
But prices for iron ore are among the big gainers as Chinese steel mills earlier this year “needed to replenish stockpiles of their key steelmaking raw material,” said Joseph Innace, an editor at S&P Global Platts.
Looking ahead, “China’s demand for steel is just OK, not great, and could weaken as the Chinese market moves deeper into the summer season, when there’s less construction activity if working conditions turn sweltering,” he said.
Meanwhile, Koos said he would focus on “safety-bid commodities” such as silver, gold and platinum PLV6, +0.09%
Those “represent investments that investors flee to whenever the markets become uncertain—and I believe there is much more uncertainty to come as the second half of the year begins,” he said.
Sugar leads crop commodities
Among crop commodities, sugar and soybeans SQ6, -0.79% took the lead, while wheat languished.
“The surge in sugar prices happened because for the first time in five years, global demand for sugar was, and still is, projected to outstrip supplies,” said Sal Gilbertie, president and chief investment officer at Teucrium Trading LLC, noting El Niño weather-related production issues in Brazil and India.
The American Restaurant Association’s Maloni said strength in the Brazilian real USDBRL, -0.7607% has been part of the reason for the reason for sugar’s price gain, but that the currency may be “setting up for a step backward, which could limit the upside in sugar prices for the next few months.”
As for wheat, a surplus has sent prices down by about 5.5% for the year.
“The U.S. winter wheat crop looks to be fantastic this year, with record yields contributing to the highest level of projected domestic winter wheat stocks in 29 years,” said Gilbertie, adding that global wheat stocks are also “record large.” Still, annual global demand for wheat is climbing and could “potentially stabilize wheat prices in the second half.”
“The grain, oilseed and sugar markets have one fundamental factor driving them: demand,” said Gilbertie. “Demand is relentless, and any supply disruptions…[have] a dramatic effect on prices because demand does not easily abate for the big agricultural products.”