Commodities under pressure

Commodities appeared to have escaped some of the worst of the volatility that affected equity markets this week with crude oil on Thursday hitting a high for the year.

Precious metals came under pressure as speculators liquidated profitable positions to cover losses elsewhere but base metals displayed some resilience.

Production cuts introduced by the Organisation of the Petroleum Exporting Counties have tightened the market and US oil demand is running at record levels. US refineries have been undergoing an unusually heavy round of maintenance work contributing to a sharp fall in heating oil and gasoline inventories. Nymex April RBOB gasoline rallied 8.9 per cent to $1.9200 a gallon this week, providing a lead for crude prices.

Refiners’ margins as measured by the benchmark Nymex 3-2-1 crude-gasoline-heating oil contracts reached $16.70 on Friday, almost triple the level of a year ago.

Gold fell 5 per cent to $648.00 a troy ounce this week. Before the latest bout of equity market volatility, speculative “long” positions betting on further price gains for gold were at very high levels. Analysts said these positions had been closed by hedge funds to pay for losses elsewhere and that dealers had de-risked their trading books as a mood of extreme caution spread across the precious metals complex.

Silver was also hit, falling 10.7 per cent to $12.98 a troy ounce in the week.

“The usual fundamental drivers take a back seat as long as investors remain jittery,” said Peter Fertig at Dresdner Kleinwort: “This asset class is just sold to reduce portfolio risk.”

The sharp fall in the Chinese equity market this week was not expected to affect its demand for base metals, according to analysts.

Chinese copper imports rose in January for a third successive month, suggesting demand is recovering, but the copper retreated 4.6 per cent to $6,105 a tonne over the week.

Codelco, the state owned Chilean company and the largest copper miner in the world, reported record profits last year in spite of a fall of 2.6 per cent in output to 1,873m tonnes. It will invest $2.2bn this year with Gaby, the main copper mine, expected to produce 150,000 tonnes in 2009.

John Hill of Citigroup said metals were not artifically inflated but commodities were diverging on individual supply/demand dynamics in a more mature phase.

Nickel edged 0.1 per cent higher to $40,850 a tonne this week after hitting a record $42,100 on Thursday, supported by critically low levels of available stocks. The Goro nickel project in New Caledonia owned by CVRD, of Brazil, remains key to improving the supply/demand imbalance.

But Goro’s costs have spiralled and rumours suggest CVRD will further delay start-up, preferring to concentrate on developing assets in Brazil