Commodity Markets Declined in December as Oversupply Continued to Drive Returns

Jan 11, 2016, 09:28 ET from Credit Suisse AG

NEW YORK, Jan. 11, 2016 /PRNewswire/ -- Commodities were lower in December, largely driven by supply surpluses and weather events, according to Credit Suisse Asset Management.

The Bloomberg Commodity Index Total Return performance was negative for the month, with 12 out of 22 Index constituents trading lower.

Credit Suisse Asset Management observed the following:

  • Energy was the worst performing sector, down 10.52%, led lower by Heating Oil as above average U.S. temperatures reduced heating demand. Brent Crude Oil and WTI Crude Oil also declined due to continued strong OPEC production and Iran seemingly set to increase production in the near-future. In the U.S., crude oil inventories also remained oversupplied.
  • Agriculture declined 1.00%, led lower by Soybean Meal, as the U.S. Department of Agriculture reported lower U.S. export sales compared to the same period last year. In addition, Argentina eliminated its export restrictions on corn and wheat, which may increase supplies available to market.
  • Precious Metals decreased slightly, down 0.85%. The U.S. Federal Reserve unanimously voted to raise interest rates mid-month. This strengthened the U.S. Dollar and reduced demand for precious metals during the second half of the period.
  • Industrial Metals gained 3.38%, led by Copper. Reports that nine large Chinese copper smelters agreed to cut output by approximately 10% in the first quarter of 2016, which was more than expected, eased concerns over excess supplies. Announced stimulus measures out of China's Central Economic Work Conference eased previous growth concerns and increased demand expectations for base metals broadly.
  • Livestock was the best performing sector, up 4.04%, led by Lean Hogs as reports of a decline in pork production led to expectations of tightening supplies. Live Cattle also increased after the USDA reported that placements in feedlots were at a record low for the month of November, decreasing U.S. beef supply expectations.

Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management, said: "Supply surpluses and weather events, particularly within the Energy and Agriculture sectors, persisted throughout the period. While some of the weather impacts may be abating, agricultural commodities have already been impacted.  In addition, there is heightened potential for next year's crop cycles in key growing regions to disappoint, though much uncertainty remains. OPEC reaffirmed that it would not cut output and the prospect of Iranian crude production coming online at the start of 2016 is likely to continue to be a driver of returns. However, toward the end of the period, tensions in the Middle East began to intensify between Saudi Arabia and Iran, among other nations. Should production from a Middle Eastern source be disrupted, the impact on crude oil and petroleum products could be sharp. OPEC spare capacity is at its leanest level in years and, while still high, U.S. crude production and planned exploration is much lower than it would have been in a higher price environment." 

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added, "Policy divergence among global central banks has become a prominent theme. U.S. monetary policy has embarked on a tightening course as the U.S. Federal Reserve raised interest rates in December. Despite recent strong U.S. economic data, inflation continues to run below the Fed's target, which may cause them to remain on a slow course toward fully normalizing rates. Meanwhile, the PBoC reaffirmed its commitment to further loose monetary policy into 2016, while the ECB reiterated it will continue its quantitative easing measures for as long as necessary. If the U.S. economy shows signs of improvement at a higher-than-expected pace, the potential of inflation overshooting expectations may increase. This, along with the potential inflation risks of continued loose monetary action out of Europe and Asia, may highlight the valuable diversification benefits of commodities in the long-term." 

About the Credit Suisse Total Commodity Return Strategy
Credit Suisse's Total Commodity Return Strategy is managed by a team with over 28 years of experience, and seeks to outperform the return of a commodities index, such as the Bloomberg Commodity Index Total Return or the S&P GSCI Total Return Index, using both a quantitative and qualitative commodity research process. Commodity index total returns are achieved through:

  • Spot Return: price return on specified commodity futures contracts;
  • Roll Yield: impact due to migration of futures positions from near to far contracts; and
  • Collateral Yield: return earned on collateral for the futures.

As of December 31, 2015, the Team managed approximately USD 7.7 billion in assets globally. 

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Certain risks relating to investing in Commodities and Commodity-Linked Investments:  
Exposure to commodity markets should only form a small part of a diversified portfolio. Investment in commodity markets may not be suitable for all investors. Commodity investments will be affected by changes in overall market movements, commodity volatility, exchange-rate movements, changes in interest rates, and factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Commodity markets are highly volatile. The risk of loss in commodities and commodity-linked investments can be substantial. There is generally a high degree of leverage in commodity investing that can significantly magnify losses. Gains or losses from speculative derivative positions may be much greater than the derivative's original cost. An investment in commodities is not a complete investment program and should represent only a portion of an investor's portfolio management strategy.

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