Heavy Selling on Commodities Markets Adds Downward Pressure on Prices

on Jul 15, 2015

Week of Steep Selloffs Impacts Commodities Prices

Commodities markets continue to bear the brunt of pressure in the Chinese stock market, and recent pressures from Greece and the EU. Bearish sentiment has pervaded the market on the back of the correction in China’s equity markets. Fears that the stocks market weakness in China could impact on the broader Chinese market have not yet come to pass. Analysts posit that only 15% of Chinese households are invested in the stock market. If the Chinese stock market rout leads to a wider decline in consumption in the country, demand could suffer. China is in the process of transitioning from an export-driven market to a consumer-oriented market.

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The Chinese economy has been faltering of late with GDP expanding 7.4% during 2014 (the slowest pace in 24 years), but for the first 3 months of the year the economy has shown increasing weakness. However, the IMF has expressed positive sentiment about the future prospects of the Chinese economy. The Chinese government is deeply invested in righting the wrongs of the equity markets slide. A series of measures was adopted to prevent further slippage in stock prices by suspending IPOs, blocking 50% of stocks from trading and relaxing regulatory processes. Combined with the establishment of an emergency fund to the tune of billions of dollars (with multiple fund managers), the Chinese authorities have successfully clamped down on further losses.

During the course of the week, precious metals were dragged lower led by gold which has been burdened by a strengthening dollar as a result of your uncertainty vis-a-vis the Greek crisis. On Friday, 10 July Federal Reserve Bank chair Janet Yellen announced that interest rates would be raised by the end of the year, thereby boosting dollar demand. Silver also declined, as did platinum and palladium. Copper dropped, so did tin, nickel and zinc. Lead was the only base metal that rose for the week. Agricultural commodities showed mixed signals with cocoa rising to a 4-year high, owing to short supplies and macroeconomic risk boosting demand.

WTI Crude Oil Prices Expected to Decline in 2016

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The Chinese stock market has been stabilised, but regulators are now focusing on the factors which have caused the boom/bust phenomenon. The Chinese government has been cautioning against the lack of transparency with respect to leverage. On 12 June 2015, the Shanghai Composite index hit a high of 5179 points, but at its nadir it reached 3500 points on 8 July 2015. Tight restrictions on grey market funding have not been a hindrance to the Chinese economic recovery. Commodities like oil have come under increasing pressure with the IAE forecasting that global oil demand would continue to slow into 2016. According to forecasts, oil demand would decrease to 1.2 million barrels daily, compared to 1.4 million barrels in 2015.

The more important market development will impact on non-OPEC oil-producing countries. Growth is expected to slow considerably in 2016 as spending and investment in oil exploration, research, new wells and current production stops. US shale oil wells will be particularly hard hit as WTI crude oil prices make it unprofitable to maintain production at current levels. On Monday, 6 July, US oil futures plunged 8 percentage points, as high supply and low demand weigh heavily on the markets. Geopolitical factors also impacted on the oil price, namely the Greek crisis and Iranian negotiations for a nuclear deal with the P5 +1.

The latter two components appear headed for a positive resolution. Downward pressure on the oil price is being brought to bear by concerns that Iran will reach a nuclear deal with the West, thereby increasing the world’s supply of this commodity. WTI crude oil futures were trading in the $50.76 to $52.74 range, while Brent crude oil futures were trading in the $56.84 to $58.63 range on Monday, 13 July.


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Cocoa Commodity Energy