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Oil Selloff Spreads To Other Commodities

Oil prices fell further on Tuesday to breach levels not seen since the depths of the ’08-’09 recession, with U.S. crude recovering ground later on short-covering and having briefly traded at parity with the global benchmark, Brent crude. The collapse to parity occurred for the first time in three months, as traders are still wondering when the six-month long price rout might find a bottom. Oil prices have already been losing for seven weeks in a row, and for current week Brent dropped 8 per cent and U.S. crude is holding a loss of about 5 per cent.

The spread collapsed to parity

The differential between the price for U.S. crude and Brent crude oil futures colapsed to parity for the first time since October, with both markets trading at $46 (U.S.) a barrel at one point.

The reason for convergence was was not known to traders, but analysts said it was a combination of short covering on the U.S. crude contract coupled with oversupplied global markets.

“The stock market rallied and that helped U.S. crude and the $44 a barrel level had been a target number for traders and U.S. crude held above that early on Tuesday,” said Phil Flynn, analyst at Price Futures Group in Chicago.

The price of Brent crude has lost around 20 per cent since 2015 kicked off, while WTI faced a fall of 16 per cent, taking more pain as oil market watchers downwardly revised forecasts.

Brent crude for February delivery was down 82 cents or 1.8% to end at $46.59 a barrel after a session low at $45.19, on ICE Futures Europe. That was the lowest settlement since March 2009.

On the New York Mercantile Exchange, oil futures fell about 20 cents to close at $45.89 a barrel, the lowest since April 2009. U.S. crude dropped below $US45 a barrel earlier in the session.

Oil’s plunge earlier in the session came after big producer United Arab Emirates said that the Organisation of the Petroleum Exporting Countries would not make any change to its November decision to keep output steady.

The comments disappointed investors are they were hoping that OPEC would change mind and reduce output considering a rout that has dragged down U.S. oil prices 14% in the first eight trading days of the year and 57% since June.

Other Commodities

The selloff spread to other commodities and the currency market. Copper fell in similar fashion as marked a five-year low. Nickel and zinc were down more than 2 percent while tin retreated 1.2 percent. Corn futures lost 4 percent. Precious metals also suffered fall, with gold retreating 0.2 percent, silver down 1.3 percent, platinum dropping 0.6 percent and palladium sliding 1.6 percent.

How investors are reacting?

Oil’s continuing declines are driving the plunge in other commodities as it increases ability to produce raw materials at low energy costs, increasing supply at a time when slow economic growth is holding back demand. Many investors say they are getting rid of their positions in commodities because the benchmarks they follow are so heavily weighted toward energy.

“There’s really no argument to buy here, when the markets are in the grip of this kind of selling,” said Paul Christopher, head of international strategy at Wells Fargo Investment Institute, which manages $1.6 trillion. The asset manager cut its exposure to energy and metals earlier this year.

On the other side, some investors consider the selloff an entry point for commodities, because they don’t expect oil prices will soon find a bottom.

“We’ll find a bottom here, sometime early in the year,” said Keith Hembre, chief economist and portfolio manager at Nuveen Asset Management, who oversees $800 million across four funds. His funds allocated more money to commodities late last year as oil prices fell.

EIA Report

The U.S. Energy Information Administration released January 2015 short-term energy outlook on Tuesday, saying global oil supplies will surpass demand in 2015 and 2016. The agency expects Nymex prices will hit an average of $54.58 a barrel this year before regaining ground to $71 a barrel in 2016.

Earlier this week, Goldman Sachs Group Inc. released its forecast calling for Nymex prices to average $47.15 a barrel this year and $65 a barrel next year.

The EIA trimmed its 2015 WTI forecast to $54.58 a barrel, down from the December projection of $62.75. and said that Brent crude would average $57.58 versus prior estimate of $68.08. WTI is expected to rise to an average $71 a barrel next year, while Brent would reach at $75 according to the report.

Investors will watching the EIA weekly supply data Wednesday to get more signs of a glut.

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