Commodity investors ended 2015 searching for the ctrl+alt+delete function hoping to wipe the year out entirely from their long-term memory banks. It was a year that saw the GSCI Commodity index fall 33%, with Energy down 38%, Industrial Metals down 26%, Agriculture down 15%, and Precious Metals down 10%. Every time we hit record short positions and oversold levels, commentators seized the opportunity to predict a short covering rally. Fundamentals overtook desperate wishful thinking, and Commodities “got low low low low low.”
At the key Dec 4th OPEC meeting, Saudi Arabia, the key driver for OPEC’s decision, had two choices: cut now to secure shorter-term revenues or play the long game and maximize longer-term revenues. Given Saudi’s coffers, it took the latter approach and decided to go “all in”. We are now in a state of play of survival of the richest and who will be able to withstand the pain for longer.
There is no mistaking the Oil markets are oversupplied. The Q4’15 global market imbalance remains significant at 1.5 million bpd. High frequency crude and product stocks in the US, Europe, Japan and Singapore built 7 million barrels vs. a flat seasonal in November with US crude and main product stocks counter seasonally rising a further 11 million barrels through December 11th. Distillate inventories are building each week on back of weak heating oil demand (17% lower than normal) as winter has not started in earnest and the season is about 40% done already. El Nino or not, if winter does not pick up soon and fast, storage capacity levels might be breached.
As fund managers spend the last few days of their winter holidays going through year-ahead strategy pieces, one cannot be mistaken for wondering if all the analysts got together at the local pub to compare notes. Divergent central bank policies favor the dollar over most G10 currencies given the path of rate hikes going forward. Short Commodities on back of the dollar call together with oversupplied markets. Long developed market Equities vs. short Bonds as economic growth remains robust. It does not really leave any room for the element of surprise.
As Q1’16 commences, we are witnessing some softer data across the board. On Friday, the official China Manufacturing PMI was weaker than expected at 49.7 vs. expectations of 49.8, still under the 50 level symbolizing contraction. The Caixin China PMI showed an even larger drop to 48.2. In the US, which has been the beacon of strength, the ISM Manufacturing index slipped to 48.2 (from 49 previously), its lowest level since 2009! The Euro area Manufacturing PMI, on the other hand, increased to 53.2. Seems a bit at odds, doesn’t it?
No doubt there is something to be said about safety in numbers, but when it comes to trading these markets and when everyone is positioned the exact same way, maybe the “tail” event is not that far out?
