Commodities including oil and copper are at risk of steep declines as recent advances aren’t fully grounded in improved fundamentals, according to Barclays Plc, which warned that prices may tumble as investors rush for the exits.
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Copper may slump to the low US$4,000s a metric ton, from US$4,945 working in london a week ago, while oil could fall back to the low US$30s a barrel, analyst Kevin Norrish said in a note. The risk for recycleables is the fact that investors seek to liquidate bets on gains quickly and in unison, with potentially highly negative consequences, Norrish wrote in the note entitled “Buffalo Jump,” a phrase that describes a cliff where Indigenous peoples herded bison for their death.
“Investors have been attracted to commodities as one of the most effective assets so far in 2016,” he said in the March 28 report. “However, even without the any concerted fundamental improvements, those returns are unlikely to be repeated in the second quarter, making commodities vulnerable to a wave of investor liquidation.”
Commodities rebounded from the more than 25-year low in January amid speculation that prices may certainly be bottoming once they lost 11 percent in the final 3 months of 2015 and 14 per cent in the third quarter. Oil and copper have recovered in the multi-year lows observed in the January and February, and Barclays estimated net flows into commodity products totalled a lot more than US$20 billion within the two-month period in the strongest start to annually since 2011.
“Given that recent price appreciation does not appear to be very well founded in improving fundamentals, which upward trends may prove hard to sustain, the risk is growing that any setback can lead to a rush for that exits that could again lead commodity prices to overshoot towards the downside,” he said.
Investors were increasingly taking short-term bets on raw materials, not the long-term buy-and-hold strategy for diversification and inflation protection that underpinned inflows in the previous decade, he said. Additionally, as commodities are among the few assets which have risen in the first quarter, that could make investors keener than usual to close out bets on gains, he explained.
“Key commodities markets for example oil and copper already face overhangs of excess production capacity and inventories, but also now face another obstacle within the process of recovery, those of positioning, that is now approaching bullish extremes,” Norrish said.
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Net Positions
Net-long holdings in copper climbed this month to 27,862 contracts, the highest since May, and were at 23,011 within the week ended March 22, based on data in the Commodity Futures Trading Commission. In oil, the net-long position advanced to 235,830, the greatest since June, after money mangers cut bearish bets to some nine-month low.
Copper for delivery in three months fell as much as 0.9 percent to US$4,901 around the London Metal Exchange , when markets reopened after a two-day break. West Texas Intermediate traded at US$38.82, and Brent was at US$39.72.
Barclays sees copper averaging US$4,520 next quarter, US$4,300 between July and September and US$4,180 in the final 3 months. The bank sees Brent at US$36 next quarter, accompanied by US$40 and US$43 in the two quarters within the other half.
Bloomberg.com
