A general view of a crude oil importing port in Qingdao, Shandong province, in this Nov. 9, 2008 file photo. (China Stringer Network/Reuters)
Remember when commodities markets were fun?
Just before Christmas 2008, WTI crude futures soared almost 18 per cent in a day. As recently as last November, the contract was able to climb 9.3 per cent on the back of OPEC announcing production cuts. Back in June 2014, soybeans fell 19 per cent in one session; three months later, sugar prices jumped 14 percent.
Those times, at least for the moment, are past. The 90-day volatility of the Bloomberg Commodity Index touched its lowest level since November 2014 this month, driven by declines in energy, crops and precious metals. Volatility in spot gold has been running at levels almost unseen so far this century.
Various reasons could account for this. The sheer volume of information that’s out there about supply and demand — and the range of instruments available for those who want to act on it — means there are fewer surprises these days. Before he founded the trading giant now known as Glencore Plc, one of Marc Rich’s greatest successes came from working out how the market in mercury functioned at a time when few other people knew or cared.
Nowadays, a day trader can check the weather forecast in Mato Grosso and use it to invest or divest in a soybean ETF from the comfort of her mobile phone — and other investors can study such funds flows to divine the direction of the market.
“Everything is transparent, everybody knows everything and has access to information,” Daniel Jaeggi, the president of oil trader Mercuria Energy Group Ltd., lamented to a panel in Singapore earlier this month.
Fundamental factors may also be playing a part. The most dramatic instance of volatility this century came in the run-up in prices before the 2008 financial crisis, when China’s voracious commodity demand crashed into markets that were short of supply, sending prices soaring. The opposite happened in 2015, with Chinese consumption dropping just as producers were running supply hard to pay off debt they’d taken on to increase output.
Right now, we’re closer to a Goldilocks economy. There’s abundant supply in both agricultural and energy markets these days, and the development of U.S. shale oil in particular has meant the market is able to respond quickly to supply shocks, causing prices to even out.
That’s great news for consumers of commodities, who generally don’t like to see materials costs go all over the place. It’s a dreadful bind, however, for traders, who depend on the gaps between high and low prices to make their money.
That helps explain why oil traders like Vitol SA and Trafigura Beheer BV are looking to invest in upstream and downstream operations where money can be made even in becalmed markets like the current one. Volatility is around an all-time low, Christopher Bake, a member of Vitol’s executive committee, told an event in London earlier this month.
It also explains why grains trader Bunge Ltd. was the subject of a takeover approach last week, and why the bidder was Glencore — a trader that’s already a long way down the road of transforming itself into an integrated commodity producer.
Such times are unpleasant for traders, but there’s a silver lining. Commodities markets have been becalmed many times before — but furious squalls have always shown up in the end.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.