Global commodity markets remain range bound

Written by Tanushree Mazumdar | Updated: May 31 2011, 02:12am hrs
The power or (the lack of it) of sell-side research (undertaken typically by brokerage houses, investment banks and others who give buy, sell or hold calls) was briefly demonstrated in global commodity markets last week. Early in the week Goldman Sachs and Morgan Stanley raised their forecast of Brent crude prices by the end of the year to $115 per barrel for a 3-month horizon, $120 per barrel for a 6-month horizon and $ 130per barrel for a one year horizon thereby sending a buy signal to the market.

Though the crude oil futures prices did rally by 2% in reaction to the report it did so briefly and then dropped by around 1% the following day, indicating that the market did not completely accept the new forecast. It might be recalled that in April Goldman Sachs had sounded bearish on commodities and had given a sell call. The rout in commodities in early May to an extent was attributed to this bearish call. But this time round the markets seemed to have kept their own counsel, while at the same time noting the forecast by the two investment banks.

The other important news with respect to crude oil was the crackdown on physical market manipulators by the US commodity regulator Commodity Futures Trading Commission in the form of a suit that was filed last week against traders in Australia, US and other some other international firms for trying to manipulate the crude oil futures market back in 2008 by hoarding physical supplies (despite no evidence of any commercial interest) causing futures price to rise.

If the regulators win the suit then the errant firms will have to give up $50 million in profits that they had made and also pay a penalty of $150 million. The action by the CFTC draws attention to the long-standing dichotomy between futures and spot/physical market: the former is transparent and yet under intense scrutiny for fraud and manipulation while the latter is opaque but rarely investigated! While on crude oil, on weekly basis WTI crude increased by less than 1%, Brent crude increased by 2.31% compared to their opening prices, aided by a weak dollar.

Among the important global macroeconomic developwas the report that the US economy had grown at 1.8% in the first quarter, less than forecast, because of a lower than forecast rise in consumer spending. The number of jobless claims also increased last week. The effect of these reports acted as a dampener on the US dollar and the dollar weakened against the Euro by 0.6% by way of response to these reports. The effect of weak consumer sentiment and the continuing woes of the Euro zone saw gold and silver gain their status as safe haven assets and COMEX gold and silver near month futures gained by 1.55% and 8.14%, respectively, over the week.

In the grains sector, there was not much change in the underlying fundamentals and near month wheat futures price gained by 0.36%, corn fell by 1.43% and soyabean fell by 0.5%. Until the planting season (in the US, Europe and China) is over, the uncertainty about the final harvest will continue to weigh on the minds of the markets and this would be reflected in volatility in the futures prices of these commodities.

Among the important events in the Indian commodity futures markets last week was the increase in the long side (buy side) margin on pepper futures to contain excessive volatility in the contracts, effective from 27th May 2011. Pepper futures have been experiencing volatility, among other reasons, because of the lack of clarity on global supply being able to match global demand in the coming period. Pepper futures declined by about 4.5%. The spices complex generally saw a decline with near month turmeric and jeera prices falling by 8.17 and 6.9%, respectively, over the week. There are also reports of weak export demand for turmeric. Arrivals of jeera in the spot markets have been mostly steady during the week. Refined soya oil futures increased by about 3% over the week reportedly on the back of rising demand in the spot market.

The writer is senior economist, NCDEX. The views expressed are her personal