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Financial Times

Commodities correction evokes memories of 2008 Add to ...



A sharp correction in many commodities markets is bringing back memories of the 2008 global financial crisis, when prices plunged in a matter of weeks.

Then, oil, for example, fell from a record high of nearly $150 (U.S.) a barrel to a low of less than $40 in the six months after oil demand collapsed.

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The supply and demand picture looks more robust this time than it did three years ago, according to the consensus of industry executives, traders and analysts. Even so, price moves in many markets have been very volatile.

Crude oil: Financial turmoil hits hard

Oil is highly sensitive to the outlook for the global economy and the animal spirits of financial markets. As equities tumbled last week and on Monday, crude tumbled in response.

On Tuesday, it fell below the psychologically important $100 a barrel level in early European trading for the first time in six months. It recovered ground later, though the market remains edgy. OPEC, the oil producers’ cartel, and private sector analysts have started cutting their forecasts for oil demand growth this year on the back of weaker economic growth

In early trade in London, ICE September Brent, the global benchmark, fell by more than $5 to a session low of $98.74 a barrel, its lowest since February. It later recovered above the $100 level, trading up $0.79 to $104.53 a barrel.

Nymex September West Texas Intermediate fell to a session low of $75.71 a barrel, but later rose to $82.05.

Gold Haven: Demand supports prices

Gold has enjoyed near-perfect conditions for a strong rally: global growth fears, a debt crisis in the euro zone, fiscal woes in the United States, negative inflation-adjusted interest rates and central bank intervention in currency markets.

The yellow metal has not disappointed, soaring 18.6 per cent since the start of July to hit a new nominal record high of $1,778.29 a troy ounce on Tuesday. It has also hit nominal records in euro and sterling terms.

The consistency of the rally has made gold bulls more confident, and investors and analysts are beginning to talk openly about the possibility that gold could hit its inflation-adjusted record, set in 1980, which translates to slightly less than $2,500 in today’s money.

The other precious metals have trailed in gold’s shadow. But investor interest is beginning to rise in platinum, which is trading close to its cost of production - which usually provides support for prices. Gold this week traded at a premium to platinum , an inversion of the normal price relationship that has been extremely rare since the 1980s.

Iron ore: Bucking the downward trend

Iron ore has bucked the weakness of the rest of the commodities sector, in what analysts say is a sign that underlying supply and demand fundamentals for raw materials remain strong.

Iron ore is mostly a physical market on which flows in financial markets have limited impact. The benchmark iron ore contract in Singapore traded at $177.5 a tonne on Tuesday, slightly down from a 2½-month high set last week, according to The Steel Index.

The commodity is up 22 per cent over the past 12 months amid strong buying from China and weather-related supply disruptions in Australia. Moreover, India, the world’s third-largest exporter, has cut its overseas sales as several states move to clamp down on illegal mining and as other states direct supplies to local steel makers.

Copper: The ‘doctor’ of the global economy

Copper dropped to an eight-month low on Tuesday - an ominous sign for some investors, who see the metal, dubbed “Dr. Copper,” as a manufacturing barometer.

On the London Metal Exchange, the red metal dropped as low as $8,446.25 a tonne, a fall of 12.7 per cent in a week, though it closed flat at $8,796. Traders said little had changed in fundamentals. For months, the copper market has been characterized by a standoff between Chinese companies waiting for prices to fall and bullish investors hoping for a signal to buy.

Investors have been more comfortable betting on metals such as aluminum or zinc, for which prices are trading near production cost. Aluminum rose 0.75 per cent on Tuesday, while zinc was up 1.2 per cent.

Corn Supply keeps prices historically high

Corn and other agricultural commodity prices have eased over the past week on weak sentiment and economic growth worries. But, while analysts expect short-term volatility, supply concerns are likely to provide support for prices. CBOT December corn has not escaped unscathed in the wider sell-off, falling 3.5 per cent from a week ago to $6.9125 per bushel by mid-morning Chicago on Tuesday.

Corn and other agricultural commodity prices have eased over the past week on weak sentiment and economic growth worries. But, while analysts expect short-term volatility, supply concerns are likely to provide support for prices. CBOT December corn has not escaped unscathed in the wider selloff, falling 3.5 per cent from a week ago to $6.9125 per bushel by mid-morning Chicago on Tuesday.

But stocks of corn are expected to remain at historically low levels due to this year’s drought in the U.S.

Investors are focused on the USDA’s latest estimate of corn and soybean supplies as well as U.S. corn yields in Thursday’s World Agricultural Supply and Demand Estimates report.

In July, the USDA forecast corn yields for the forthcoming harvest at 158.7 bushels per acre, but Macquarie estimates the figure to be 155.8.

“More rain is predicted in the next few weeks, but we will see how much damage has been done,” said Chris Gadd. analyst at Macquarie.

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