Sliding oil leads to rout in commodity prices
Commodities fell across the board on Monday following oil’s lead in the wake of the Opec decision to maintain production levels.
The Bloomberg Commodity Index of 22 raw materials fell to its lowest level since May 2009. Crude, which plunged last week in the wake of the oil cartel’s meeting on Thursday, fell further, with ICE January Brent falling as much as $2.62 to $67.53 a barrel while copper lost almost 2 per cent to a four-year low.
Gold was down 1 per cent in volatile trading to a five-year low after Switzerland rejected a referendum to increase its holdings of gold and a measure of manufacturing activity in China showed further weakness. It later rebounded, and was trading up 0.6 per cent at $1,174.36 a troy ounce.
The weakening of the oil price has led to a broader sell-off in commodities as investors pull money out of sector funds amid worries over global economic growth and weakening demand.
The oil-producing nations of Opec that gathered last week in Vienna decided not to cut production despite weaker demand and a surplus of oil. The price of Brent crude has dropped more than 40 per cent since mid-June to below $70 a barrel.
JBC Energy, the oil consultancy, said the market was attempting “to find a new price floor now that Opec has pulled the rug from under the market’s feet”.
While cheaper oil is set to benefit importing countries, its price drop has come amid signs of further slowdown in China, the world’s biggest oil consumer, and stagnant growth in the eurozone.
“To us this fall in prices seems demand rather than supply led and so any benefit will be negated by the declining world growth outlook,” Rabobank said in a report.
China’s official Purchasing Managers’ Index, a gauge of manufacturing activity, fell to 50.3 in November, the lowest in eight months. The People’s Bank of China cut interest rates last month for the first time in two years.
In industrial metals, copper has been hit the hardest, falling around 13 per cent so far this year. While the price has been supported by alleged purchases by China’s State Reserve Bureau, that may not happen next year if they think copper is the “the other shoe to drop” amid a commodities market rout, Goldman Sachs said.
Gold fell after a total of 77 per cent voted Sunday in Switzerland against the Central Bank holding at least 20 per cent of its assets in gold. While analysts had not expected the referendum to pass, gold fell to touch $1,140 in trading, its lowest level since November 7.
“With such an overwhelmingly large vote against adding gold to holdings it’s unlikely that anything like that will come again in the foreseeable future,” Stephen Briggs, a metal strategist at BNP Paribas said. “It was one of the last hopes of some of the bullish commentators that’s now been kicked away.”
The result is likely to encourage those who are short gold to extend positions, UBS said. A weaker oil price also hurts gold because it could lead to stronger global economic growth, the bank said.