Commodity Prices… The disconnect..
There is a huge disconnect between price action in physical markets where differentials are signalling oversupply and futures markets where all looks rosy.
Financial drivers have been key in this commodity rally, with short-covering driving part of it, but fresh longs being drawn in. Net speculative length in Brent crude has doubled since the start of the year to its highest level since data collection began in 2011.
In copper the LME net long position has grown by 60% since the start of the year and on COMEX copper, speculators have swung rapidly from short to long.
The recovery in oil prices, in particular, is helping to allay concerns that important parts of the global economy might slip into a deflationary spiral. As investors have become more confident about the future (or at least less pessimistic), many of the deflation-axed positions built up earlier this year, especially in fixed income markets, are being unwound.
Graphs from Ecowin, Barclays Research. Click on graph to enbiggen.
The risks for a reversal in recent commodity price trends are growing and with fewer market makers to absorb the shocks, potentially, a period of high volatility could lie ahead. Energy markets, especially oil, look most exposed and although copper fundamentals are firmer and prices less at risk of a large downward adjustment, volatility is likely there too, especially as there is further weakness in China.
This is a stupid prognosis by investors (lemmings) in anticipating a turnaround in the demand.
It ain’t going to happen.
When it collapses a lot of people will be burnt. In fact expect a few hedge funds to lose billions. Everyone is gambling on a recovery, it is a gamble brought about by bigger collapse of risks in all markets…..
Watch this space…
Wow, looking at this graph, it won’t be long.