May 19, 2024

Ending Run, Investors Abandon Commodities

Investors dumped commodities like silver and coffee and sugar that had seen a vast — and some said worrying — build up in prices within the last year on expectations of strong global demand.

The sharp sell-offs in part were prompted by fears about a slowdown in economic growth in the United States and around the world.

After four months of surging higher, oil prices plummeted by 9 percent as traders worried that American drivers were beginning to balk at paying nearly $4 a gallon of gasoline. Oil fell below $100 a barrel for the first time in two months.

“Pop goes the bubble,” said Michael Lynch, president of Strategic Energy and Economic Research , a consulting firm.

Gasoline prices have not yet declined, though experts say they have probably peaked and will begin falling in the next few days — probably in time for the Memorial Day weekend.

Equity markets were also lower with the Dow Jones industrial average falling 1.1 percent while the broader Standard Poor’s 500-stock index lost 0.91 percent. The declines came as the markets await the April jobs report to be released Friday, with analysts expecting weak employment growth.

“One day does not make a trend, but this correction was overdue,” said Addison Armstrong, senior director for market research at Tradition Energy, a consulting firm.

In a gut-wrenching drop, the Reuters-Jefferies CRB index, which measures prices for a basket of commodities such as oil, metals and grains, fell 4.9 percent, its biggest one-day percentage drop since March 2009. The index has fallen 8 percent over the last four days; in March, it fell nearly 7 percent over a period of six days.

“It was a horrendous day,” said Douglas J. Hepworth, director of research at Gresham Investment Management, which specializes in commodities.

However, analysts cautioned that the respite from high commodities prices might only be temporary. The trends that have led to the rise in prices for food, energy and metals — a growing middle class in China, India and other developing countries, and the unrest in the Middle East — have not gone away. Meanwhile, many economists are optimistic that the current inconsistent performance of the United States economy is only temporary, and growth will strengthen later this year.

Still, many saw price drops as a healthy correction after what seemed an unsustainable run-up in commodities prices. The price of silver, for example, has risen 149 percent since September 2010. The run-ups had drawn repeated warnings from the Federal Reserve in recent months that they would not last.

“I think it’s very healthy,” said Michael Rose, a trader at Angus Jackson. “The market was like a seesaw with everyone on one side, and now the markets will have time to clear out and balance.”

He added, “The losers are going to be the small investors who thought it was going to go on forever like in the cases of the real estate and Internet bubbles.”

Traders and analysts said the sell-off had a combination of causes. One of the initial triggers was comments by Jean-Claude Trichet, president of the European Central Bank, who suggested in remarks to traders in Frankfurt that European interest rates would not be rising until later this year — later than many had anticipated.

This put downward pressure on the euro, and led to a rally for the dollar. Many commodities are denominated in the dollar, and as these became more expensive globally, this immediately prompted selling in nervous commodities markets, particularly oil.

“You’re in a situation where a lot of these markets have pushed to all-time highs and it’s at a point where it became very unstable and that’s where you started to topple,” said Dax L. Wedemeyer, a broker analyst with US Commodities, a brokerage firm West Des Moines, Iowa.

He said that investment funds seemed to be pulling out of commodities, including both hedge funds and the long-only index funds.

But commodities markets had been on edge for days after the CME Group began to raise margin requirements at the end of last month for the silver market, requiring traders to put down extra collateral to compensate for the higher prices.

The move by the exchange, which was worried that traders could get caught out by the extreme volatility in prices that had accompanied the price rises, precipitated a sharp sell-off in silver in recent days. The silver price fell a further 8 percent on Thursday, taking its decline to more than a quarter since the peak at the end of April.

“People reacted to the dollar, to Trichet and to silver,” said Paul Horsnell, head of commodities research at Barclays Capital. “Silver is one of the least important markets but it had become a beacon” for unease in the commodities markets, he said.

Market players said investors were also nervous that regulators would soon intervene to limit what many saw as a feeding frenzy in commodities.

After surging since January, the decline in oil prices on Thursday sent the price of a barrel of light sweet crude below the psychologically important barrier of $100.

Energy experts say that oil was due for a price correction after rising more than 30 percent over the last year.

The drop should feed through to the gas pump. Prices are currently 30 cents a gallon on average higher than a month ago and more than $1 higher than a year ago.

“The driver can expect to see a slow erosion of prices,” said Tom Kloza, senior oil analyst at the Oil Price Information Service. “My expectation is what people pay this week will be the highest they pay for 90 days.”

Oil stockpiles in the United States and other industrial countries have been full, leading experts to expect a correction in prices that had been driven higher by fears that unrest in the Middle East would spread to vital oil producers like Saudi Arabia and Algeria.

The Energy Department reported that crude inventories last week had risen by 3.4 million barrels, largely because gasoline sales had eased. A variety of government and private surveys in recent days indicate that gasoline demand declined over the last month from 1.2 to 4 percent from the year before. Analysts said this news had been one of the factors behind the sell-off Thursday.

Binyamin Appelbaum, Seth Feaster, Christine Hauser and William Neuman contributed reporting.

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