So far this year we’ve spent some time and effort monitoring secular trends in major asset classes, estimating the value of the US dollar versus the majors and commodity currencies, while costing various sources of protein. Today we’ll round off the theme with a pot pourri of other commodities. Prices have been on a roll and we’ll try to untangle the currency effect from real changes in supply and demand.
First and probably the most important is crude oil, the chart below being the Nymex front month light sweet crude future for delivery FOB at any pipeline or storage facility in Cushing, Oklahoma. As you can see it started rallying smartly late last year, having snaked around the psychological level of $50 per barrel for the previous 18 months or so. The rally from $50 to the high so far at $66.66 (spooky number – Bitcoin’s high last year was $19,666 and the S&P 500's low in 2009 was 666) represents a 32 per cent increase in price.
However, over the past four months the US dollar index (against a basket of major currencies) lost 7 per cent of its buying power and a whopping 15 per cent since January 2007; thus, almost half of crude oil’s price rise is directly caused by the depreciation of its unit of account. Prices at the pump will, as always, reflect the full nominal increase, with consumers’ wallets taking a hit, adding to our sense of getting poorer as wage rises haven’t kept up with inflation for the best part of a decade. In this respect, we can only hope that the rally fizzles out soon and that the contract drifts back down towards $50 as we wrote in this year’s first issue.
Copper is among the most important base metals, essential for construction and electronics. While a lot of the futures volume is now traded in Shanghai, New York has seen an explosion in the number of contracts traded, with a new record set last month. Priced as cents per pound of grade 1 electrolytic copper, it too has seen a steady rally since the second half of 2017. After holding for months around $2.65 we hit a high at $3.32 at year-end. The 25 per cent rally is again US dollar related, to which the law of small numbers is added. More importantly the $3.25 area is the mean price of the last decade, so we are back at some sort of equilibrium. We expect the rally to overshoot so that prices are closer to $3.60 to $3.80 this summer. Good for Chile and other producers; not so good for builders.
Coffee, without which some people would find life unbearable, is and has been subject to wild swings for at least four decades. The ICE Futures US Arabica contract is currently close to its very long-term mean price of $1.30 per pound; it has not budged much despite one of the US dollar's worst years ever. Chances are that it will hold between $1.10 and $1.60 throughout 2018.
CME soft red winter wheat futures, one of the oldest contracts listed, rallied since December from $3.86 to $4.55 cents per bushel, up 17 per cent and starting one standard deviation below the ultra-long-term mean. Excellent volume over the past decade should help the rally we favour towards the psychological level and long-term mean at $5.00 – some time this year.
