Commodities

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Commodities in 2018 were hampered by the strong US dollar which rose from mid-April, a collapse in oil prices from early October and the ongoing U.S.-China trade war. The best performers were cocoa, wheat, oats and last years best palladium. The worst performers were Gasoline, WTI Crude, lumber and sugar.

 2018 Bloomberg Index

Commodities, as measured by the Bloomberg Commodity Index of 22 commodities was down 12.1% for 2018. The dollar index was up 5% on the year. The dramatic collapse in oil prices, which saw oil and products fall over 40% in the last quarter of 2018 was telling. The fact that the VIX was the best performing futures contract for the year underscores the fear of further market collapses which pulled the bid, not just from oil but also metals. The economic bellwether copper lost 19 percent on the Comex as the global growth story that sent risk assets higher to be unwound.

In China, which led the demand and rising prices in commodities after the GFC has been stalling with the US trade war hurting. China’s manufacturing purchasing managers index dropped to 49.4 in December, the weakest since early 2016, and below the 50-level that denotes contraction. Among the industries of most consequence for global raw materials, the steel industry PMI fell to 44.2. China makes half of the world’s steel, Going forward for commodities one big catalyst that will determine the demand and flow of some commodities is the ongoing U.S.-China trade war.

2018 Relative PerformanceSource: Finviz

Cocoa's run began at the start of 2018 and pulled back hard.

London cocoa prices rose almost 30 percent in 2018 after recovering from six-year lows. The move was sparked by dry weather in top producer nation Ivory Coast which sent speculative fund inflows higher. Towards year end supply picked up, going forward drought will be the major catalyst here. Ivory Coast estimates its main crop production at 1.985 million tons, down from previous estimates just over 2.0 million tons. What is pertinant here, and not unlike other commodities such as natural gas much of the gains were given back by year end. 

Cocoa 2018

Cocoa hit a high of 2914 in April, after building a base closed the year at 2428, it began the year at 1895. The risks are clear. 

Gasoline Prices Collapsed After Generous Iran Sanctions 

Oil prices collapsed after the U.S. administration gave unexpectedly generous sanction waivers to Iran’s biggest oil buyers coupled with increasing concerns over the China-American trade dispute hurt the outlook for oil demand.  The move by the US was particularly damaging as the POTUS's  tough talk on Iran had seen oil prices surge over 25% on expectations of supply contraints from Iran bans, furthermore POTUS pressured Saudi Arabia to increase production. The result after the soft waivers was that oil hedgers were caught unaware, speculators were at near record longs and supply massively increased, at the same time the US was hitting all time production highs, remaining there at year end.

Price reacted accordingly and collapsed 40%, Gasoline prices fell even more dramatically as the economy stalled and the trade war hit export sales, though they remain in record territory.

Gasoline 2018

Gasoline futures fell from a high of $2.15 to a low of 1.2450 in the post soft sanction environment, a move of 42%.

A further by-product of the action was it was another nail in the overbought US stockmarket with energy stocks being crushed on the falling prices and being a key component of the US economy. In Texas the Dallas Fed manufacturing index for December slid a massive 22.5 points to -5.1 from +17.6 in November. Texas businesses are also being negatively impacted by the trade war. Since then we have seen US stocks have their worse year since 2008. We took about unexpected consequences here is a prime example.

Sources: Bloomberg; Investing, finviz

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