Commodity Markets: Hedge Funds Hold Record Short Position in the Last Three Years

—

—

Little by little, and here we are at the beginning of December! The last month of the year is always volatile in commodity markets, so it is to be expected that it will be the same this time. This week will not pass without data that impacts the movement of commodity prices. The market will focus on a set of macroeconomic data in the U.S., which are important for assessing future inflation trends, which is linked to the upcoming meeting of the U.S. FED. The market is increasingly convinced of a ‘soft landing’ scenario for the U.S. economy, which includes a loosening of the FED’s monetary policy and a weaker dollar. This week, the USDA also released its December report. Hedge funds now hold a record short position in the last three years, following last week’s weather and selling momentum.

Conflicts in Gaza have continued and intensified over the weekend and are likely to keep Ukraine out of the world’s focus, despite reports that Russian drones and cruise missiles have again allegedly hit various targets in Ukraine. Yemeni Houthis targeted two Israeli ships in the Red Sea with drones and missiles, the Philippines monitored the illegal presence of more than 135 ships in the South China Sea, while North Korea stated that any interference with its satellite operations would be considered a declaration of war. So, on the geopolitical front, nothing new.

Oil Prices Fall Again

U.S. GDP grew by 5.2 percent in the third quarter (compared to an estimate of 4.9 percent; and a growth of 2.1 percent in the second quarter). Inflation in the Eurozone fell to 2.4 percent, below market expectations. Economies continue to show the effects of ongoing inflation issues, namely rising interest rates, but it seems that a tight labor market and continuous consumer spending are helping to avoid a severe recession.

While U.S. stocks are trading slightly below the highest levels of 2023 and within five percent of all-time highs thanks to the second-best performance in November since 1980, China is facing significant problems with its stock market. Chinese stocks fell again last week, extending their recent weaker performance compared to global competitors. The CSI 300 index fell to its lowest level since 2019, raising fears that the housing crisis could break the economy. The decline in home sales accelerated in November, despite increased government financial support.

On global markets, oil prices fell again last week (extending the downward trend to six consecutive weeks), this time by about 2 percent, as traders are skeptical about OPEC’s production cuts and due to a lack of optimism regarding the strength of key global economies. The price of Brent crude is below $79/bbl at the start of the new week, while the price of WTI crude is around $74/bbl at the start of the new week. Comparing current prices to those from mid-September, when prices reached their highest level this year, they are now down by more than 15 percent. OPEC and its allies have decided to cut production in the first quarter of next year by approximately 700,000 barrels per day.

OPEC’s policy is clear – through production cuts, reduce supply which will lead to price increases. However, the market is skeptical about OPEC’s strategy (which has invited Brazil to become a member of the group) primarily because a larger cut was expected, as the production cuts are voluntary and there will be no controls. In such conditions, there is still fear that weakening economies will weaken demand for oil. Currently, price support is only provided by traders’ conviction that central banks in Western countries have finished the cycle of interest rate hikes, given that inflation is easing. However, economies are likely to stagnate or weaken in the coming months, and it will be months before central banks can start lowering interest rates and thus support economic recovery.

Wheat in the U.S. Reached Lowest Contract Levels

Natural gas prices in Europe TTF fell to €42/MWh due to persistently low demand, allowing the region to maintain healthy gas reserves. Despite the cold period, withdrawals from storage were minimal compared to previous years. On Saturday, gas storage in the EU was at 94.4 percent, slightly lower than 97.7 percent a week ago. Additionally, temperatures are expected to rise by the end of the week, reducing heating demand. Furthermore, the challenging economic outlook indicates limited potential for significant increases in industrial consumption in the near future.

Over the past decade, global agricultural production has grown at an average annual rate of 1.94 percent, much slower than the production growth rate of 2.74 percent in the previous decade and lower than the average annual rate of 2.3 percent over the last six decades (1961-2021). The slowdown in agricultural growth is mainly associated with a slowdown in the growth rate of total agricultural factor productivity (TFP), which fell to 1.14 percent annually in the period 2011-2021 (compared to 1.93 percent annually in the previous decade). TFP measures the amount of agricultural output produced from the aggregate inputs used in the production process (land, labor, capital, and material resources).

Wheat in the U.S. early reached the lowest contracted levels due to concerns over large deliveries, but then encountered what is known as short covering due to weekly export sales that were far above the pace needed to achieve the annual estimate by the USDA. In Argentina, BAGE maintained the crop at 14.7 million tons, but stated it could increase as frost damage appears to be less than expected. Argentine wheat is becoming price competitive in Southeast Asia, while Brazilian feed wheat is competitive in Asia.

Australian futures reached a six-week high closing value, but physical commodity markets were quiet as traders tried to assess the extent of damage from weather conditions. MATIF Dec reached a 26-month low as port silos are full and there is a delay from China, but position covering by funds, Moroccan sales, and bad weather in the Black Sea where strong winds and sea waves caused significant shipping problems helped recover prices. After three weeks of decline, MATIF ended the week with an increase of €3/t.

Gold Prices Increased Significantly

Corn prices on the CBOT recovered from 28-month lows due to concerns over Brazil and high export sales for the marketing year. Despite an 11-week high for the real, Brazilian futures for March rose to a 7-month high against the CBOT, indicating increased concerns about domestic stocks. At the same time, delayed soybean planting has brought additional concerns for the Safrinha crop, which will not be available on the global market until July-August. Precipitation in October and November in central Brazil was 200-300 mm below normal, making December’s weather even more critical. BAGE maintained the Argentine crop at 55 million tons.

Despite imports into the EU still being 40 percent lower than last year, MATIF fell to its lowest levels and ended the week down €1/t, while the Black Sea market faced rising transportation costs due to political uncertainty. Concurrently, soybean prices on the CBOT fell to their lowest level in the last month. The soybean crop in Argentina is estimated at 50 million tons, but the situation in Brazil is more uncertain. Planting in both countries is delayed. Due to drought in central and northern regions and continuous rain in southern Brazil, it is difficult to estimate the area that will be planted with soybeans, leading to increasingly wider ranges in yield estimates.

Gold prices reached their highest level in the last seven months last week, driven by a decline in the U.S. dollar and bond yields. Gold benefits from rising market expectations that the FED will change its policy in the first half of next year. In the new week, gold continued to rise and reached a historic record level of over $2,100/oz, after which the price fell. Something is brewing. Major Chinese copper smelters have agreed to a 9 percent reduction in processing, which translates to a loss of about 1.5 percent of global copper supply. This could impact the increase in ‘core’ inflation.