Commodity Bounce

It has been a very volatile period for commodities since August 2015. Federal Reserve Chair Janet Yellen's comments in September that a hike in interest rates before the end of 2015 is very likely, put the U.S. economy back on the path to normality after years of rock-bottom interest rates. This news made Brent and WTI oil prices reach their highest levels for several months.  

However, with OPEC unwilling to cut production, the markets have been flooded with an oversupply of Crude oil, when demand has weakened. The near 62% decline in Oil price since 2014 has seen many of the high cost oil producing nations and companies buckle under the pressure. It has also led to inflation in most economies remaining subdued as Oil struggles to battle the fundamentals of oversupply alongside a strong US Dollar. On top of that, the massive builds in October’s weekly US Crude oil inventories have raised concerns of global oversupply, further pushing down the price of crude oil.

In addition, Oil took a hit when China said gross domestic product grew in the third quarter at its slowest pace in more than six years. These concerns about a slowdown in China have hit the mining sector hard, with demand slowing just as years of investment in new production brings a glut of supply on to world markets. The price of many raw materials, including copper, coal and oil are at or close to their lowest levels since the financial crisis. On the other hand, China’s decision to cut their interest rates (23 October 2015) gave confidence to US dollar investors, that the FOMC is going to raise rates in 2015, which would result in a stronger dollar and weaker demand for Oil.

The bounce effect has also been observed in other classes of commodities as well. Similarly to the bounce that occurred in the end of August, commodities like gold and platinum had a steep rise in price in the beginning of October giving a false impression to investors that it is a strong bullish bounce. Gold bounced from 1,105 in to 1,185 in the first two weeks of October and has since come off to 1,165. Platinum has risen from 898 to 1,023 in the same time, with a current price of 990.


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Reuters: Business News

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