Investors bullish on prospects for commodities

Futures and options contracts on price rises are at their highest level for a decade

Grain prices had been trending downwards since 2012 but have rallied more than 45% in six months, according to Vontobel Asset Management's head of commodities, Michel Salden. Reuters

Commodity investors are back in full force, with record wagers that crops, metals and oil are set for a rally.

A weakening dollar is making materials denominated in the currency more appealing at a time when equities are on a tear and the world is on a path to recover from the coronavirus pandemic. All of that has prompted speculators to pile back into commodity markets, boosting combined bets on rising prices to the highest in at least a decade.

That’s a stark turnaround for a corner of the financial market that had been struggling to lure investors since the China-driven commodities super-cycle earlier this century. The backdrop is looking familiar: The Asian powerhouse is on a buying spree again and investors are looking for alternative places to put their money as central banks try to prop up economies.

“Commodities are on a winning streak right now,” said Michel Salden, head of commodities at Vontobel Asset Management. “Markets are rallying due to the combined effect of US dollar weakness, the cyclical recovery from Covid-19, central bank stimuli, and increased fiscal spending on infrastructure.”

Investors are so bullish that they were holding a net-long position, or the difference between bets on rising prices and wagers they will fall, of 2.3 million futures and options contracts in the week ended January 5, according to data compiled by Bloomberg. That’s the most since at least January 2011.

The calculations include 19 of the 22 raw materials in the Bloomberg Commodity Index. They exclude aluminum, zinc and nickel, which are reported by the London Metal Exchange on a different basis.

Money managers’ bullish bets on corn are currently at the highest in almost 10 years. China is loading up on American crops, having already bought a record amount of the grain, while soybean purchases are running at the fastest pace since 1991. Sugar has also caught investors’ attention, with Alvean, the world’s largest trader of the sweetener, forecasting two years of shortages ahead.

“Even grains, that had been on a downward path since 2012, have rallied more than 45 per cent over the last six months due to La Nina-related droughts in Latin America,” Salden said. He also highlighted China’s role in securing strategic reserves of commodities.

Oil, which is rebounding from an unprecedented crash triggered by the pandemic, has rallied to 10-month highs after Saudi Arabia’s surprising decision to unilaterally cut production by 1 million barrels a day for February and March.

The rally has also extended beyond headline crude prices and into options and signs of strength on both ends of the oil futures curve. Speculators boosted bullish bets on Brent to an 11-month high, while net-long positions in petrol climbed to a 10-month high.

“Crude oil looks like a great play as the economy reopens, demand picks up and people build confidence around the vaccine,” said Phil Streible, chief market strategist at Blue Line Futures in Chicago. “Saudi Arabia really bent over backwards to try and help support prices.”

Bets on rising gold prices rose to a 16-week high, and platinum net-longs are at the highest since February. Investors also boosted net-long positions bets on silver for the fifth week in six.