In the past month corn for December delivery has fallen 8.5 per cent, December wheat has tumbled 18 per cent and November soyabeans have fallen 8.3 per cent
Commodities prices are heading for their sixth loss in seven years. But commodities markets have never been bigger.
Open interest — the number of commodities contracts outstanding — has been booming on futures exchanges this year. From crude oil to soyabean oil, the markets’ size has increased by nearly 1.4m contracts in the first nine months of 2017, the most in seven years.
Just this week, open interest in US crude futures hit a new record of more than 2.4m contracts on the New York Mercantile Exchange. In London, low-sulphur gasoil futures surpassed 1m contracts for the first time. Total open interest in contracts tracked by the benchmark Bloomberg Commodity Index is 14.3m, the most on record, according to Bloomberg Intelligence.
The increase may seem puzzling, given commodities’ status as one of the decade’s worst-performing asset classes. The Bloomberg index has lost investors 38 per cent since 2010, compared to a 164 per cent total return from the S&P 500 stock index. Volatility has also been subdued, robbing fund managers of opportunities to make big profits.
Some believe higher open interest shows investors are once again flirting with commodities. Assets under management in commodity products recently jumped above $400bn for the first time in more than a year, according to Aakash Doshi, an analyst at Citigroup. While the Bloomberg index is lower for the year, it has gained 2.9 per cent in the quarter ending this week.
“If you look around, bonds have had a good run, stocks have had a good run. Commodities are one of the few asset classes that have gotten crushed,” says Tim Atwill, head of investment strategy at Parametric, a Seattle-based asset manager with $3bn in commodity funds. “People say, ‘Well, it may not be a bad entry point’.”
Arithmetic suggests lower prices themselves may have pumped up open interest. One hundred dollars can now buy roughly two barrels’ worth of US crude oil, which was trading on Thursday at $52.55 a barrel, compared to one when it still traded above $100.
The low volatility pervading financial markets these days is also a factor, says Greg Sharenow, a commodities portfolio manager at the fund manager Pimco. Smaller price moves mean exchange clearing houses generally demand less margin, or collateral, to be held against outstanding futures positions. This enables fund managers to make bigger bets.
“The increase in open interest has been a function of both the lower volatility as well as lower prices. For a dollar at risk to be in the market, you end up with higher amounts of contracts at play,” he says.
Mr Sharenow also points to the increasing prevalence of systematic investment strategies that follow price trends or trade commodities against other asset classes. Managed futures funds, one type of investor in this category, have taken in $5bn in new investment in the year to date, bringing their assets under management to $126bn, according to eVestment.
Companies that typically use futures markets to hedge price risks have also stepped up activity in some commodities markets. US shale oil producers have unleashed a wave of forward sales to lock in a recent rise in crude oil prices, deals that filter into the futures market.
Derek Sammann, global head of commodity and option products at Chicago-based futures exchange operator CME Group, says that at a time of relatively stable commodity prices, “it might seem counterintuitive to see increases in open interest”. CME lists such commodities as corn, gold and US crude oil on four exchanges, including Nymex and the Chicago Board of Trade.
He questions the idea that investment funds sparked growth in open interest, saying that commercial businesses such as miners, oil companies or farmers typically come first.
Indeed, a number of the biggest commodity exchange traded funds, such as the $2bn PowerShares DB Commodity Index Tracking Fund or the $2.3bn United States Oil Fund, have suffered outflows this year, according to ETF.com.
In the past three years, CME has “made the end-user commercial participant central to all of our sales and new client engagement strategies”. If commercial traders come, “the financial players tend to follow”, Mr Sammann says.
Open interest has not climbed uniformly across all futures contracts. In US oil futures on Nymex, the sum has plunged for contracts to be delivered years from now. One reason is because Wall Street banks are taking less risk in illiquid markets. Another, says Mr Sammann, is because the shale industry that has transformed US oil production operates on much shorter timescales than megaprojects, reducing their need to hedge in the distant future.
Investors wading back into commodities tend to hold contracts for delivery in the near future, where open interest is highest, rolling them into new contracts as they expire. Mr Atwill calls commodities “a very liquid asset class that at the very least is not as overvalued as everything else.”
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