A day after commodities investors rushed for the exits, analysts at different brokerages are taking stock of what led to the frenzy and what lies ahead.
The sharp fall on Thursday highlighted concerns that have bothered market participants for some time, including the negative impact on consumption of high commodities prices, especially for oil; a slowing in the pace of US economic recovery; and relative softness in China's import demand for key commodities, such as copper and soybeans, analysts at Barclays Capital said in a note to clients.
"Against this backdrop, this week's huge decline in silver prices and substantial strengthening of the dollar appear to have triggered a phase of long liquidation in commodities that had been brewing for some time, but will probably not last for very long," Barclays said.
Goldman Sachs, which last month forecast the downturn in oil and other commodities, said disappointing economic data releases and the US oil inventory data on Wednesday were catalysts for the sell-off in oil.
The brokerage still believes oil supply-demand fundamentals will tighten further this year, and reach critically tight levels by early next year should Libyan oil supplies remain off the market.
Here is a list of brokerages and their comments after the crash:Barclays Oil: Crude oil prices fall in the midst of exaggerated sentiments and technical triggers though the movement is not fundamentally justified; we see this as a buying opportunity.
"Slowing Chinese and Indian demand due to rising inflationary concerns and hence rising interest rates", "a weaker US economy", "higher oil prices destroying demand", "QE2 coming to an end" and a "stronger dollar" were all put forward as reasons for the pullback, but none of these seem to be either a new or a different catalyst to what we have seen in the past.
Goldman Sachs Oil: While a large portion of the risk premium likely came out of prices yesterday, we remain wary of the potential for further downside in coming days. While we saw recent prices as having risen above the levels consistent with underlying near-term supply-demand fundamentals, we continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil suppliesremain off the market.
Even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year.
Deutsche Bank Overview: We believe fears of an end to QE2 have triggered a significant correction across the commodities complex. Since the short US dollar macro trade is heavily concentrated in commodities and emerging markets, these markets have been punished.
Oil:We believe the collapse in oil prices this week is more a positioning event than a change underlying fundamentals. Indeed US energy prices overall and gasoline prices specifically are not at the point of breaking the back of the economy in our view.
Metals/Materials:Deflationary fears are coming back to the fore as monetary accommodation is apparently withdrawn. Risk aversion and US dollar strength are likely to continue in our view, putting pressure on the metals complex. We expect that nickel and copper are most vulnerable while aluminium should continue to outperform.
Agriculture:The relative resilience in corn prices has been impressive given the significant length held by the speculative community in this market. However, we doubt the agricultural sector and specifically corn will remain immune to investor liquidation.
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J.P.Morgan: We believe the oil market remains supply-constrained and that this decline offers an opportunity for consumers to guard against upside price risk. Comments from China's Central Bank that it would raise the reserve requirement ratio as high as necessary to choke off inflationary conditions raised concerns of slowing demand.
A week ago, it was hard to find a bear in the oil market-today there is a hot debate on which direction crude will move next. Market balance has been restored. OPEC is arguably less likely to aggressively add oil supplies to the market in the coming months following the collapse in oil prices.
Thursday's decline reduced the value of petroleum futures open interest by around USD 35 bn. Margin calls would have been significant, and may have contributed to selling pressure.
Euro/dollar fell 1.9%, the dollar index strengthened by 1.6%, but Brent sold off by 8.6%. Front month crude fell in all currencies, so this wasn't simply an FX story.
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Commerzbank Oil:There was no single factor triggering Thursday's plunge. The price of oil was already tending towards weakness in the days before. Follow-up selling is likely to have been triggered by Brent dropping below the USD 120 a barrel mark and exacerbated by disappointing economic data from the United States and Germany and the firmer US dollar.
The latest data have also fuelled concern that the high price level is starting to curb demand. US gasoline demand fell last week by over 2%, week-on-week, although demand normally picks up in the spring.
Precious metals:The silver market is correcting the previous exaggerated price rally and is pulling other precious metals down with it.
Furthermore, Jean-Claude Trichet indicated after the ECB meeting Thursday that the next interest rate hike is unlikely before July. This has caused the US dollar to appreciate strongly, another reason for the downward trend on precious metals to continue.
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MF Global: We think that the early May sell-off has recalibrated the markets to more reasonable, but still excessive, valuations. As a result, we suspect that there may be a little bit more to go on the downside before things start stabilizing. We could see more evidence of slowing worldwide growth, as the impact of higher energy prices and interest rates needsome time to filter through the system.
The straight-up commodity bull markets of late 2010 and early 2011 will be replaced by broad sideways trading markets. This is a much healthier situation to be in and bodes well for the overall global growth picture.
In the energy space, we think the chart damage is substantial enough to likely force WTI prices down to USD 95, and possibly down to USD 90 over the course of May.
Although base metals have not been caught up in the froth that had engulfed the precious metals group over the past few months, we still think that copper and aluminum may have more work to do on the downside.
