The Bloomberg Commodity Index [energy 30.57%, grains 23.46%, industrial metals 17.39%, precious metals 15.29%, Softs ( coffee, sugar, cotton ) and 7.22%, livestock 6.07%] closed Friday at 82.6787, just 9.733% above a five-year low struck in January 2015. The Index is -5.53% in 2017. The commodity complex is not monolithic, it's multi-sided. Crude oil and gold are the big head-line grabbers, and I will return to crude oil momentarily.
The breakfast commodities [think of what a good breakfast contains] rolled over a while back. Coffee and cocoa prices are at multi-year lows. The high-flying Cote D'Ivoire has already dialled up Christine Lagarde at the IMF. Interestingly, here in Kenya, with food inflation at an eye-popping 21% year-on-year, we have seen the prices of our breakfast commodities squeeze higher. Internationally, sugar prices are at two-year low,s but here we are at an all time high. This anomaly is something we should be discussing, but I am not afforded the space to do that in today's article. Those sugar licences are, however, worth their weight in gold. Avocados [which are not in the commodity basket] have found an off-ramp and are at all-time highs. Kakuzi, which is listed at the Nairobi Securities Exchange, and has a market capitalisation of $55m (Sh5.67 billion) grows a lot of avocados, by the way.
Anyway, I have digressed and want to turn to crude oil which is the big beast in the commodity complex, the elephant in the room as it were. Crude Oil Prices have plunged -13% in three weeks and WTI crude oil traded Friday morning below $44.00 a barrel before recovering to close at $46.22 a barrel, a one-year low. This is a far cry from the “Go-Go” days. Nicholas Maduro's Venezuela is at breaking point. Other capitals are going to run out of options. I have previously spoken about How the US shale [cow]boys have OPEC over a proverbial barrel. Shale can turn the tap on faster than OPEC can turn it off. The US oil rig count has more than doubled from a year ago to 703 this week, according to Baker Hughes Inc's data Friday. Nationwide crude production rose to 9.29 million barrels a day last week, the highest level since August 2015, according to the Energy Information Administration.
The OPEC “Go-Go” days of Sheikh Yamani, his prayer beads and delphic pronouncements belong to yesteryear. Mohammed Sanusi Barkindo, the current OPEC secretary-general, is a poor imitation of Yamani and is playing with a set of cards that is stacked against him. Reserves have been depleted from Abuja to Riyadh, from Luanda to Caracas and in all the oil producing capitals in the world. So many capitals are fiddling while sitting on a tinderbox and playing with matches. The deputy Crown Prince was quoted on Al-Arabiyya about Iran: "How can I communicate with them while they prepare for the arrival of al-Mahdi al-Montazar?"
This is deluded thinking at a time when things could seriously fall apart:
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand [W.B Yeats The Second Coming]
On Friday, about $7 million worth of options changed hands that will pay off if WTI crude falls beneath $39 a barrel by mid-July, according to data compiled by Bloomberg. Options trading can be a little like buying a ticket to the lottery, but the point is we need to be modelling what a $39.00 a barrel price will look and feel like. We have experienced a precipitous downside move and, in my opinion, the exponential recent momentum is signalling there is further to go. My price target is $32.00 a barrel. Crude oil prices in extremis move exponentially. This move has all the ingredients for turning exponential. Some thought they found a floor Friday, but I expect them to be rudely awakened.
It's a wizard of Oz moment, folks. There is no one behind the curtain and this market is primed to crash.
Aly-Khan is a financial analyst