By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) — Most commodities have suffered hefty declines so far this month, but the move may offer consumers a stronger reprieve from high gasoline prices and a cheaper entry point for investors as the bull markets in gold and oil remain largely intact.
As of Thursday month to date, futures prices for gold GCM2 -0.46% have fallen over 4% and oil CLM2 -0.39% lost more than 7%, though an unexpected standout has been natural gas NGM12 -0.40% , which climbed nearly 9% so far this month.
Regulation in the oil market
David Peniket, president of ICE Futures Europe, talks on the role of regulation, speculators and position limits in the oil market.
The slowdown in China combined with uncertainty around a third round of quantitative easing has “brought the bull case for commodities into question and investors/traders are cutting down their exposure in response,” said Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund, a precious metals-focused fund based in Miami, Fla.
But the sharp declines shouldn’t have come as a surprise for the market. “The smart money was scaling back their commodity exposure all last year due to valuations and the amount of hot money coming into the sector,” Mimani said. “There were a lot of new investors in the space and that was concerning to the old-timers.”
In 2011, oil prices climbed more than 8% and gold added 10%.
China has been a big worry for commodity investors, as data continue to show a slowdown in the nation’s economic growth. Data released this month showed China’s factory activity cooled for a sixth-straight month in April.
And financial woes in Europe have continued to feed a downturn in global equities markets as well as lower expectations for oil and gold demand.
Gold investors, in particular, have been taking their cue from the U.S. Federal Reserve, as they try to gauge the central bank’s stance on monetary stimulus. Read about gold and the Fed.
At the same time, concerns over the tensions between Iran and West have calmed, allowing oil prices to give up at least part of what had been deemed as a “war premium” — ahead of a potential conflict involving Iran that may have impacted global oil supplies and result in the closure of a key oil shipping channel. Read more on Iran and oil.
“We will be finding out in the months ahead if gold and oil are still in bull markets or rolling over and entering a bear phase,” said Mimani.
Energetic moves
Oil’s plunge below the $100-a-barrel level on May 4 came on the heels of disappointing April data on U.S. jobs growth, and Europe’s political upheaval has managed to depress prices even further — good news for gasoline consumers.
“Oil prices are notoriously volatile and I had been predicting the changed market fundamentals, so the size of the resultant price decline shouldn’t have come as a surprise but if I’m honest, it did,” said Matthew Parry, a senior oil-market analyst at the International Energy Agency.
‘The size of the resultant price decline shouldn’t have come as a surprise but if I’m honest, it did.’Matthew Parry, International Energy Agency
“The big hit to oil is due to concern about lower demand driven by weak economies in the U.S. and Europe,” said James Williams, an energy economist at WTRG Economics. “The jobs report in the U.S. was far below expectations and European elections bring into question the will to address their debt crisis. There is fear of contagion from Greece to Spain and Italy.”
Recessions historically lead to a collapse in oil prices and Europe, “by most measures, is already in one,” he said. Concerns over Europe have weakened the euro, adding strength to the U.S. dollar which, in turn, contributes to a lower price for dollar-denominated prices for oil and gold, he said.
For now, “expect further deterioration in price due to supply rather than recessionary impacts,” said Tom Box, an oil-and-gas industry expert based in Richardson, Texas.
“There’s no shortage of oil on the market and there are oncoming supplies from all producers,” he said. Producers’ forecasts don’t show any decline in production in the future and “such announcements signal oil supplies going forward as less of a political lever and more of a commodity to be priced to market.”
All the while, natural gas has been holding its own despite abundant U.S. supplies. Prices have been creeping higher — for eight out of the last 10 sessions as of Thursday.
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The U.S. government forecasts as much as a 21% growth in utility demand this year, as the sector continues to shift away from coal, said Beth Sewell, managing partner at Quantum Power & Gas Services. If that is the case, the demand will “absorb quite a bit of the excess production.”
Still, oil’s decline has claimed most of the energy market’s attention. On Wednesday, it logged its sixth session of declines, the longest losing streak since July 2010, according to FactSet Research data.
“The recent setback in oil is meaningful and it is now up to oil to prove it is in a bull market by trading over $110,” said Mimani. “Until then, we can assume the bull is on hiatus.”
Also in the meantime, consumers can look forward to a delayed reaction to the lower oil prices in the gasoline market, just in time for the summer driving season.
Reuters
Every time oil prices change by $1 a barrel, it equates to about 2.5 cents a gallon at the pump, said Jeff Lenard, a spokesman at the National Association of Convenience Stores, a trade group for an industry that sells 80% of the nation’s gasoline.
Even so, it takes anywhere from a couple of days to 10 days to be reflected in retail gasoline prices, he said.
Tom Kloza, chief oil analyst at the Oil Price Information Service, said national gasoline prices have already peaked for this year.
In the next couple of months, consumers can expect to pay 10 cents to 25 cents a gallon less for motor fuel than they paid last year, he said. Read more of Kloza’s comments in The Tell blog.
Gold dulls
Gold’s fall below $1,600 an ounce has rattled some investor confidence over the metal’s ability to resume its rally.
“Gold has suffered because the Fed hasn't given any clues that there is more monetary easing on the way,” said Sam Kirtley, chief executive officer of SK Options Trading. Although the economic data have been poor, they have “not yet become bad enough for the Fed to act.”
“We won’t go long again until we see a turn in Fed language or a severe deterioration in employment data (which would prompt Fed easing),” he said.
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On Tuesday, gold violated its 300-day spot price moving average of $1,632.51, according to Brien Lundin, editor of Gold Newsletter, adding that his records show that the last time gold violated that moving average was during the credit crisis of 2008.
That implies the current situation is of similar type and magnitude to that crisis, he said. “From a practical standpoint and using the fall of 2008 as a guide, we could expect extreme volatility in gold and the rest of the metals complex.”
Previously, however, “those volatile days ended up carving an extreme low for gold, and the resulting recovery marked one of the greater opportunities in gold’s recent history,” said Lundin.
Short term, gold may continue to experience downside pressure given the euro-zone fears, as well as slowdowns in both China and India, said Sanjeev Sardana, financial adviser and chief executive officer of Bluepointe Capital Management in San Mateo, Calif.
“On a long-term basis, gold has a place in most investment portfolios for two reasons: We foresee demand returning from emerging markets, and more and more investors buy gold as a hedge against inflation,” he said.
Myra Saefong is a MarketWatch reporter based in San Francisco.
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