Barclays Warns Commodities May Slide on `Rush for the Exits' (1)

Commodities including oil and copper are at risk of steep declines as recent advances aren’t fully grounded in improved fundamentals, according to Barclays Plc, which warned that prices may tumble as investors rush for the exits.

Copper may slump to the low $4,000s a metric ton, from $4,945 in London last week, while oil could fall back to the low $30s a barrel, analyst Kevin Norrish said in a note. The risk for raw materials is that investors seek to liquidate bets on gains quickly and in unison, with potentially highly negative consequences, Norrish wrote in the note entitled “Buffalo Jump,” a term that describes a cliff where Native Americans herded bison to their death.

“Investors have been attracted to commodities as one of the best performing assets so far in 2016,” he said in the March 28 report. “However, in the absence of any concerted fundamental improvements, those returns are unlikely to be repeated in the second quarter, making commodities vulnerable to a wave of investor liquidation.”

Commodities are headed for a quarterly advance amid speculation that prices may now be bottoming after they slumped 11 percent in the final three months of 2015 and 14 percent in the third quarter. Oil and copper have recovered from multiyear lows seen in the January and February, and Barclays estimated net flows into commodity products totaled more than $20 billion in the two-month period in the strongest start to a year since 2011.

‘Risk Is Growing’

“Given that recent price appreciation does not seem to be very well founded in improving fundamentals, and that upward trends may prove difficult to sustain, the risk is growing that any setback will result in a rush for the exits that could again lead commodity prices to overshoot to the downside,” he said.

Investors were increasingly taking short-term bets on raw materials, not the long-term buy-and-hold strategy for diversification and inflation protection that underpinned inflows in the previous decade, he said. In addition, as commodities are among the few assets that have risen in the first quarter, that may make investors keener than usual to close out bets on gains, he said.

“Key commodities markets such as oil and copper already face overhangs of excess production capacity and inventories, but also now face another obstacle in the recovery process, that of positioning, which is now approaching bullish extremes,” Norrish said.

Net Positions

Net-long holdings in copper climbed this month to 27,862 contracts, the highest since May, and were at 23,011 in the week ended March 22, according to data from the Commodity Futures Trading Commission. In oil, the net-long position advanced to 235,830, the highest since June, after money mangers cut bearish bets to a nine-month low.

Copper for delivery in three months rose as much as 0.7 percent to $4,981 a ton on the London Metal Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term on Tuesday, when markets reopened after a two-day break. West Texas Intermediate for May delivery dropped as much as 0.6 percent to $39.15 a barrel on the New York Mercantile Exchange, set for a fourth day of losses.

(Updates with CFTC CFTC The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commiss The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commiss Read this Term copper, oil data in penultimate paragraph.)

To contact Bloomberg News staff for this story: Jake Lloyd-Smith in Singapore at jlloydsmith@bloomberg.net. To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith, Sungwoo Park

By: Bloomberg News

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