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Commodities Rose on Tightening Crude Oil Inventories and Higher Demand Expectations for Metals

Commodities increased as OPEC+ reduced crude oil production and as demand expectations for industrial metals grew.

The Bloomberg Commodity Index Total Return increased for the month, with 21 out of 23 constituents posting gains.

Credit Suisse Asset Management observed the following:

  • Energy increased 9.22%. Saudi Arabia and Russia were voluntarily reducing production and exports while Libyan and Iranian production also decreased.
  • Industrial Metals gained 8.05%, led higher by Nickel, after the Chinese government pledged additional stimulus measures following a $29 billion tax cut plan for small businesses, raising demand expectations for base metals.
  • Agriculture was 3.04% higher for the month. Soybean Oil gained as adverse dry weather conditions in Brazil hurt soybean crop growth during the main grain filling season.
  • Livestock declined 1.50%, led lower by Lean Hogs, as severe cold weather in the US Midwest region closed some pork production facilities, while also lowering pork consumption expectations.
  • Precious Metals increased 3.23% as the US dollar weakened due to higher market expectations for a slower trajectory in interest rate hikes in 2019 by the Fed.

Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management, said: "At the end of 2018, OPEC and its allies agreed to cut output by approximately 1.2M bbls/day relative to October 2018 levels. So far, data for December 2018 suggests they are on their way to meeting their stated objective. As markets continue to monitor compliance to the agreement, ongoing geopolitical tensions may also play a role. US sanctions on Venezuela’s state-owned oil company may potentially slow down the production of refined products in the US, as Texas and Louisiana refineries, which typically process heavier grades of crude from Venezuela, struggle to find alternative supplies. In addition, as US sanctions on Iran remain in place, various European nations have implemented a new trading mechanism, called the Instrument in Support of Trade Exchanges, to continue doing business with Iran. If the US deems this mechanism in violation of its sanctions, retaliatory punishments may be put in place. Any new trade barriers enacted by the US may weaken global growth prospects."

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added: "There is currently concern in many global regions about potentially slowing growth. Although British Prime Minister Theresa May’s separation plan was rejected in January, both the UK and Eurozone are heavily incentivized to find a resolution in order to avoid a hard landing. Following a large drop in the Eurozone’s industrial production reading for November, the ECB noted that there are now more downside risks to its economy. In China, effects from ongoing US-China trade tensions continued to harm its economy as the National Bureau of Statistics Purchasing Managers' Index for January revealed that China’s manufacturing activity contracted for a second straight month. In the US, the Fed has committed to maintaining a patient approach to future monetary tightening. Central banks globally continue to seem more focused on preventing headwinds from slowing down growth than they are concerned about higher levels of inflation. Any upside surprises to growth may also result in greater-than-expected inflation, which should be supportive of the commodities asset class given its historically high correlation to unexpected inflation." 

About the Credit Suisse Total Commodity Return Strategy

Credit Suisse’s Total Commodity Return Strategy is managed by a team with over 35 years of combined experience, and seeks to outperform the return of a commodities index, such as the Bloomberg Commodity Index Total Return or the S&P GSCI Total Return Index, using both a quantitative and qualitative commodity research process. Commodity index total returns are achieved through:

  • Spot Return: price return on specified commodity futures contracts;
  • Roll Yield: impact due to migration of futures positions from near to far contracts; and
  • Collateral Yield: return earned on collateral for the futures.

As of January 31, 2019, the Team managed approximately USD 8.0 billion in assets globally.