Volatility continues to remain high across all financial markets, especially in the commodity markets. Fear of recession on the one hand and supply side hurdles have caused volatility to increase in physical commodities – both hard and soft.
Crude oil prices crashed by nearly 10 percent on Tuesday as fears of a recession mounted. Oil prices fell despite Saudi Arabia announcing a price hike for all its crude grades in August for Asia delivery. Though Arab Light prices were increased by Saudi Arabia, those of Brent and WTI crude fell sharply as fears of another round of shutdowns in China kept markets jumpy.
A report by Citigroup Inc stated that crude oil could collapse to $65 a barrel by the end of this year and slump to $45 by the end of 2023 if a demand-crippling recession hits, and this added to the selling pressure. Citigroup’s outlook is based on an absence of any intervention by OPEC+ producers and a decline in oil investments. Citi’s outlook compared the current energy market with the crises of the 1970s.
“For oil, the historical evidence suggests that oil demand goes negative only in the worst global recessions,” the Citi analysts said in the July 5 note. “But oil prices fall in all recessions to roughly the marginal cost.”
Joining oil were other commodities, hard and soft, leading to the belief that government actions to control inflation are working.
According to the Wall Street Journal, natural gas prices that had increased by 60 percent at one point during the June ending quarter, closed the quarter 3.9 percent lower. US crude, after touching a high of above $120, fell below $100 a barrel.
Soft commodities like wheat, corn, and soybeans all closed the quarter below their March levels. Cotton has lost one-third of its price since early May.
Prices for building materials like copper and lumber have dropped 22 percent and 31 percent, respectively, while a basket of industrial metals that trade in London had its worst quarter since the 2008 financial crisis.
Whether the fall in commodity prices is because of collective government action is debatable. However, traders have already started reducing their positions. JPMorgan Chase & Co commodity strategist Tracey Allen said about $15 billion moved out of commodity futures markets during the week ended June 24. It was the fourth straight week of outflows and brought to about $125 billion the total that has been pulled from commodities this year, a seasonal record that tops even the exodus in 2020 as economies closed.
Exits from their commodity positions suggest that fund managers and traders believe that a bet on recession is a bigger trade than one on inflation. So does this mean that inflation has topped? We will know when the impact of these market prices percolates down to consumption levels.
The impact of lower commodity prices can be seen in the performance of some Indian FMCG companies, as this article on Marico by my colleague Ravi Ananthanarayanan highlights.
Volatility in financial markets has rubbed off on the cryptocurrencies. We have today two articles showcasing the problem that is plaguing the asset class, including an article from Financial Times about why cryptocurrencies are not the new monetary system we need.
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