Returns on commodities slip on oil prices to the lowest since 1991

London

A GAUGE of returns on raw materials tumbled to the lowest since at least 1991, extending the agony that producers of energy, industrial metals and agricultural commodities faced in 2015.

The Bloomberg Commodity Index, a measure of returns from 22 raw materials, fell as much as 1.5 per cent to 74.02 on Tuesday. A roundup of the bearish numbers: Crude oil in New York dipped below US$30 a barrel, copper fell to less than US$2 a pound and natural gas as low as US$2.24 per million British thermal units.

The expansion of the global economy has faltered, supplies of everything from oil to copper to grains are ample and a stronger US dollar has eroded the appeal of raw materials as alternative investments.

Recent market turmoil in China further added to concerns that consumption in the biggest commodities buyer will slow. The rout is hurting producers including Freeport-McMoRan Inc, Glencore plc and Anglo American plc, who invested in boosting output following a decade-long super cycle.

"I've sort of given up trying to call bottom," said Fiona Boal, a London-based director of commodity research at Fulcrum Asset Management. "Commodities have a finite value, they serve a purpose. You need copper, you need oil, you need corn. You should always be able to view where the marginal value is. By all measures, we are getting closer to that."

Oil futures in New York slid to the lowest in 12 years before US government data on Wednesday that's forecast to show crude supplies rose, exacerbating a global glut.

West Texas Intermediate slipped as much as 4.7 per cent to US$29.93 a barrel.

The Organization of Petroleum Exporting Countries has effectively abandoned its longtime strategy of limiting output to control prices.

Copper futures retreated as much as one per cent to US$1.9525 a pound on the Comex in New York. That's the lowest since 2009.

"We seem to be in a long-term period of low, low commodity prices," said Bill Blain, a strategist at brokerage Mint Partners in London. "There is no short-term reason why this trend of falling commodity prices will end."

The BCOM Index tumbled 25 per cent last year in a fifth straight annual loss that was the longest streak since the measure's inception in 1991. The gauge is already down more than 5 per cent in 2016, its worst start to a year ever.

Hedge funds are positioning for more losses, holding the biggest net-short bet across raw materials since at least 2006. A combined measure of net-short positions across 18 commodities reached 164,203 future and options contracts as of Jan 5, the latest government data show. That's the most bearish since the data began in June 2006. The gauge turned negative for the first time ever in November.

The decline for prices is dragging down commodity companies. Shares of Freeport, the world's biggest publicly traded copper producer, tumbled 20 per cent on Monday, the biggest one-day loss since the data began in 1995. The shares fell an additional 4.6 per cent on Tuesday.

BHP Billiton, the top global miner, is trading near the lowest in a decade in Australia. The S&P 500 Oil & Gas Exploration and Production Index fell as much as 4.9 per cent on Tuesday to the lowest since 2009.

The prolonged price slump is a reversal from the previous decade, when booming growth across Asia fuelled a synchronised surge in prices, dubbed the commodity super cycle. Farmers, miners and oil drillers expanded supplies, encouraged by prices that were at record highs in 2008.

Now, that output is coming to the market just as global growth is slowing. The World Bank last week lowered its growth forecast for the global economy, warning that the slowdown in China will mean more weakness for raw materials.

"If you look back to the catalyst for the super cycle, it was China, and now with the weakness in China, we're seeing the reverse," Quincy M Krosby, a market strategist at Prudential Financial, said from Newark, New Jersey. "The death of a cycle is very unnerving and difficult for other parts of the market." BLOOMBERG