CM: Oil prices tumble as speculative bubble bursts
The financial and sovereign debt crisis continues to set the agenda for almost every investment decision being taken at the moment. During May the crisis in Europe escalated (again) and turned a dangerous corner with the focus switching to Spain, where a bank funding crisis is putting the government under severe pressure. Meanwhile in Greece, the new election is still weeks away with the outcome potentially putting Greece’s future within the Eurozone at risk. China, the main global growth engine since 2008 is slowing, and the US economy is in a mid-cycle slowdown.
These events helped drive investors towards secure government bonds, with two-year German yields going negative, and safe currencies such as the Japanese Yen and especially the US dollar, which rose to a 23-month high versus the euro. Commodities, meanwhile, saw one of the biggest monthly drops since 2008, with the broad based Dow Jones-UBS Commodity Index falling by more than nine percent, as all individual sectors, as seen below, came under heavy selling pressure. The energy heavy S&P GSCI recorded its worst month since 2008, slumping by almost thirteen percent as both WTI crude and Brent crude fell more than 20 percent from their highs and technically entered into a bear market.
Precious metals put in the best relative performance, somewhat indicating that the safe-haven attraction of gold is not completely gone. Considering the strong move in the dollar, gold’s losses were limited and it even recorded a small gain measured in Euros. It never the less continues to struggle to rekindle its attraction among leveraged investors such as hedge funds.
The energy sector, led by WTI crude, was the hardest hit, as focus increasingly switched from geo-political risks to a slowdown in demand. The bursting of the speculative bubble in both Brent and WTI crude also played an important role in explaining the dramatic move lower. The agriculture sector was also exposed to elevated levels of volatility with gains in livestock and wheat more than offset by major losses in cotton, corn and soybeans, mostly due to good weather prospects and speculative investors reducing their long exposure.
