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Commodity markets in worse shape than in 2009, and more risks to outlook
[SINGAPORE] With oil, copper and coal trading around their lowest levels since the global financial crisis, some investors are betting that the bottom may be close for these critical commodities and have increased their long positions in the market.
Yet those hoping for a similar strong recovery seen in 2009 need to tread with care.
For industrial commodities like copper, China was the saviour of markets following the 2008-09 crisis after Beijing unleashed massive economic stimulus programmes to boost demand.
Back then, confidence in China's capacity to underpin demand for commodities supported a contango forward curve with copper futures contracts for later months above the spot price.
But signalling a far more cautious environment this time forward prices through the first half of 2016 are trading at a discount to nearby levels.
This has been attributed to a sharp slowdown in economic activity and a shift towards less commodity-intensive industries in China, that have helped knock a third off copper prices this year.
The world's top consumer of base and ferrous metals for the past decade has also built up huge metal inventories. "With China decisively moving away from an industrial focus to consumer growth, there is little reason to be bullish long-term for metals," said Virendra Chauhan, analyst at consultancy Energy Aspects.
Forward prices in oil markets also showed more confidence in 2009 than they do today.
At the start of 2009, US crude oil futures for the following January were more than a third above spot prices, giving buyers a sense that prices would likely rise.
Yet now forward prices for oil indicate that such optimism is not widely shared.
A modest contango is in place whereby January 2017 prices are trading US$6 a barrel above those for January 2016, just half of the spread seen six years ago.
The curve is also too flat to make it attractive to buy oil and store it for sale at a later stage, as freight and storage costs still have to be included. "I think it (the flat forward curve) reflects the 'lower for longer' price thesis," said Energy Aspect's Chauhan.
Since 2008-2009, soaring output from US shale drillers has added to record output from Middle East and Russian producers, overwhelming the market and contributing to a 60 per cent slump in crude prices since mid-2014.
Most analysts see the glut lasting well into 2016 and beyond. "The flat curve is related to the shale oil boom. The back of the curve is broken because of producers selling as soon as curve prices edge up. They need the cash, especially shale and medium-sized producers," said Oystein Berentsen, managing director of crude oil at Strong Petroleum in Singapore.
Arguably in the worst condition is coal, which meets almost two thirds of China's energy demand, and where forward prices are trading steeply below current values that are already near their lowest in more than a decade.
As China shifts away from heavy industry and towards cleaner energy sources, coal demand is falling.
While coal still enjoys growing demand in other emerging markets, China's diminishing appetite means that some analysts, including Goldman Sachs, have called a stop to any investments in coal mining capacity, arguing current production will suffice to meet future demand.
Despite the bleak outlook, there are bargain hunters in the market who are expecting prices to bottom out soon.
Data showing traders' positions in the market show an increase in long exposure to crude oil and copper lately.
Non-commercial long positions in US crude are at their highest since May, while managed money long positions in LME copper are at their highest since June.
In the energy arena, bargain hunters appear to be spurred on by expectations that low oil prices will encourage fuel demand, while copper buyers are motivated by expectations that China's infrastructure plans and growth in other emerging markets will increase the use of metals.
Though others question this optimism. "Decelerating demand growth is the key downside risk to oil prices and we see few encouraging signs that global GDP growth will stimulate acceleration in demand for these fuels,"investment bank Jefferies said on Wednesday.