When Will the Commodities Bear Market Turn Around?
Hedge funds have adopted the most bearish position on commodity prices in over a decade, driven by worries of an intensified economic downturn affecting demand for various raw materials ranging from crude oil to metals. In August, notable price declines were observed in oil, iron ore, and copper.
As per Bloomberg data from mid-August, money managers have amassed a record net-short position of nearly 153,000 futures and options across 20 commodity markets, the highest since records began in 2011, according to the US Commodity Futures Trading Commission data.
The economic deceleration in China—traditionally the largest engine of demand growth over the past two decades—along with a subsequent production rebound, has dampened investors' interest in raw materials. This trend has been exacerbated by recent fears of a U.S. economic recession, particularly after disappointing manufacturing data released on a Tuesday further heightened market anxieties.
Oil Demand Weakens and Output Remains Strong
International oil prices have shown a downward trend for three consecutive months. Following a 5.5% drop in August, $Brent Last Day Financial Futures(DEC4) (BZmain.US)$ prices fell an additional 4.8% in just four days of September, currently standing at approximately $73.0 per barrel. The recent decline in oil prices is attributed to a weakening demand outlook and robust production levels, particularly in the United States, where crude oil production is near historical highs.
Despite rumors on Wednesday that OPEC+ might delay its October production increase, the anticipated end to Libya's export disruptions and the persistently weak demand outlook continue to pressure oil prices.
Last week, Goldman Sachs and Morgan Stanley both revised their oil price forecasts downward. Goldman Sachs reduced its Brent crude oil price forecast range by $5 per barrel to $70-85 and lowered its 2025 futures average price prediction from $82 per barrel to $77, mainly due to slower growth in Asia's crude oil demand driven by the proliferation of electric vehicles and unexpectedly high efficiency in U.S. oil supply.
Morgan Stanley shares a similar view, noting weaker-than-expected market demand and predicting that Brent crude oil prices will find support around $70 per barrel by next year.
However, with demand set to slow after summer, and both OPEC and non-OPEC supply to increase from the fourth quarter, we foresee a softening balance, turning to surplus in 2025.
Iron Ore's Balance Requires Production Cuts
Global iron ore prices have plummeted to a two-year low, influenced by a decline in steel demand. In August, prices briefly fell to $90 per ton, marking the lowest level since November 2022. Following the largest drop in three months on Monday, iron ore futures on the Singapore Exchange further declined to $91 on Thursday. This significant price drop has put pressure on the profits of the top four iron ore producers— $BHP Group Ltd (BHP.US)$, $Rio Tinto (RIO.US)$, $Vale SA (VALE.US)$, and $Fortescue Ltd (FMG.AU)$—resulting in an approximate $100 billion evaporation in market value.
The continued decline in iron ore prices is primarily due to two factors. On the one hand, China's iron ore port inventories have risen back above 150 million tons, exerting ongoing pressure on prices. On the other hand, the global economic growth outlook remains uncertain. BHP, the world's largest miner, cautioned about persistent challenges in the iron ore market, anticipating that supply will surpass demand into the next year, driven by China's slowing economy and weakened property market.
Xinying Yao, Director of Steel at SMM, a metals data provider based in Shanghai, stated that considering the time from land acquisition to construction, it is challenging to foresee an improvement in steel demand from the property sector within the next 12 months.
Many of the steel mills have to cut down production until the industry gets a tighter balance. We think there's still space for the iron ore price to come down to $90 per tonne.
Persistent Inventory Pressures May Continue to Affect Copper Prices
$Copper Futures Current Contract (HGcurrent.US)$ prices soared to new heights above $11,000 per ton in May, driven by significant investment inflows. The surge was primarily based on the rapid shift towards electrification (including both electric vehicles and data centers powering artificial intelligence) and a trend of manufacturing reshoring, partly due to anticipated supply shortages. Additionally, concerns about declining mine supplies were also prevalent.
However, since the peak in May, copper prices have declined by nearly 20%, with a notable increase in inventories and a surprising spike in exports from China, raising concerns about consumption in the world's leading consumer. Leading copper mining firms, including First Quantum, SCCO, TECK, FCX, have seen their stock prices retract, erasing gains from the previous five months.
Goldman Sachs analysts, Samantha Dart and Daan Struyven, noted in their latest report that the substantial reduction in copper inventories will occur later than initially expected. They have revised their forecast for next year's copper prices down to $10,100 per ton and delayed their projection of copper reaching $12,000 per ton from the end of 2024 to post-2025.
Softer-than-expected China commodity demand, as well as downside risks to China's forward economic outlook, lead us to a more selective, less constructive tactical view of commodities.
Analysts have concluded their long-standing bullish recommendation, falling short of their previous target. Despite this, they noted that clients could have achieved a 41% return on the trade. The bank anticipates reopening the position at a later time, as it continues to foresee a significant supply deficit in the market.
Gold: The Brightest Star in Commodities This Year
Despite a slight retreat in gold prices recently, the price of gold remains above $2,520 per ounce. In August, gold reached a record high, surpassing $2,570 per ounce, with a year-to-date increase exceeding 15%. Concerns over the U.S. dollar's stability and market expectations for a Federal Reserve rate cut have been key drivers.
Goldman Sachs has expressed the most confidence in gold's upward potential among commodities, maintaining an early 2025 target price of $2,700 per ounce. As the Federal Reserve prepares to cut rates, increased capital inflows from Western financial institutions are expected to drive gold prices higher. Furthermore, the continued strong demand from central banks worldwide will provide ongoing support.
What's Next for Commodity Markets?
According to the latest research report from HSBC, the global commodity market entered a bearish phase in mid-July. Historical data suggests that bear markets typically last at least three months, and the current cycle may already be halfway through. Recent decreases in the probability of this bearish cycle indicate early signs of a transition to another phase.
Michael Hartnett, a prominent strategist at Bank of America, holds an optimistic long-term view, suggesting that the commodities bull market is just beginning. He notes that the average inflation rate in the 20th century was 5%, attributing the lower 2% CPI since 2000 to rare factors such as globalization, low debt levels, demographic structures, and disruptive technologies. However, he believes the reversal of these forces indicates a structural shift back to 5% inflation.
Commodity secular bull market in the 2020s is just getting started as debt, deficits, demographics, reverse-globalization, AI & net zero policies are all inflationary.
Source: Bloomberg, Finviz
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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