It may seem like energy prices should go up at this time of the year, but the normal winter season has been factored into prices already. Prices depend on the ruthlessness of the weather, its extremes. Historically, there is no clear seasonal trend during winter – for example if you analyze price movements of heating oil during the last five years you would say: “Wow! Go long and no second thoughts”. But if you perform the same exercise over 30 years, you would say exactly the opposite.
So, what to do? My suggestions are: (A) watch the weather every day, the Climate Prediction Centre website does an excellent job; and (B) check inventory-level reports by the US Energy Agency on Wednesday and Thursday. Be aware that markets are not perfect and price behaviour can defy logic, so weather and inventory reports are not a guarantee. I witnessed that twice in the case of natural gas last quarter – first time I got heads, second time I got tails. And make sure you use stop-losses.
Industrial metals interest me in Q1. We have started seeing a few initial positive signs: US durable orders are rising, manufacturing is improving in many countries, Chinese industrial yields are improving, and the ECRI index shows some small growth. I am watching these markets and may initiate longs very soon. It may look like 2013 won’t be as bad as some predicted. It won’t be a year of prosperity, but we may see some improvements. I expect industrial metals to grow in Q1. Besides, Q1 is a period of rallies in many markets – a new year brings new hopes, new optimism. We can benefit from that.
Precious metals (PM) received what they had all been waiting for – a signed blank cheque: QE3 unlimited in the US and EU. Last time I wrote that QEs, coupled with real growth, may bring a rally in the PM sector. We got QEs and we still expect solid real growth. But it has yet to come. I would be neutral for some time, but I think that metals with “two souls” (industrial use and investment value, like platinum) have better chances than pure gold.
Grains retreated in Q4, but come Q1 they may be on the move again. US crops were bad in 2012 and drought is still on the table, so winter crops could be affected, too. The next wave of crops is coming from South America. It is too early to speculate how good or bad they will be. I would refrain from bets on this sector for now, with the exception of soy oil. The biggest exporters of soy are Argentina, the US and Brazil. The US had a poor crop last year, Argentina is flooded and has delayed plantings, and Brazil tends to export unprocessed beans instead of processed oil. There are also concerns that logistics issues in Brazil may hamper delivery of grains to ports. For now, the important news to watch every Thursday is US export sales reports: if competitor countries do well, US exports shrink and vice versa.
Speaking just from an historical perspective, cattle and hog prices tend to rise in Q1. This year the effect could be magnified by the US drought, which has increased prices for corn, used for animal feed. This pushed farmers to sell more during the drier summer/autumn of 2012 and as a consequence reduce their herds and reduce future supply. I would not buy immediately, but study the market a bit further. I am neutral for now, with a bullish outlook.
Coffee was a huge disappointment last quarter – the Brazilian crop was too successful and speculators shorted coffee heavily. Sugar followed the same pattern. Both commodities have now passed the period of harvesting and over the next few months there should be no issues from the supply side. Cocoa is not going to rise in value until late May/early June as crops have been good and the political situation in producer countries has remained stable. Trade accordingly.
The cotton crop in the US was plentiful in 2012. I do not think prices will rise in Q1. I do not expect them to fall either because they are already at low levels. I am neutral. Lumber prices have shown decent growth lately, fuelled by optimism about a recovery in the building sector. I think the market is running ahead of itself. While a recovery is inevitable, it was not justified for lumber to grow by 20 per cent in the last couple of months. How long the rally will last – that’s another story. Not too long in my opinion. So, on top of all the above-said, in January/February we may see upward pressure in all markets, but in March the markets will sober up and pull back.
Andrey Bezverkhiy is a Hong Kong-based financial professional. Here he presents the second of his quarterly previews about what is set to shape the commodities market. If you want to read more, visit his blog.