Trust me on this one, it’s not as far fetched as it first seems. Commodityworld(tm) is a big place, and there have been a number of commodities in the news recently, some familiar to energy, and some not. So let’s take a closer look at some of these headline grabbers, through their natural comparisons to our pixelated friends from Toy Story.
A Crude Tail
What first sent me on the Toy Story tangent is the way that crude oil has been following equities recently. I know the relationship has been somewhat apparent over the last eighteen months or so, but this relationship has tightened even more in recent weeks. For July, the correlation between the S&P500 and the first-month WTI price has been a remarkably strong +0.93 (correlations can run from + 1.0 to -1.0), which makes me draw the analogy with Slinky the dog. Equities represent the head, and crude is , erm, the rear. Corporate earnings surprises are causing the excitable head of the dog (equities) to lead the charge for risky assets. This leaves crude at the other end of the slinky, being whipsawed around, yet following nonetheless. No tail wagging the dog here, crude is ignoring its own fundamentals for the most part, and being easily led.
Cocoa and Lumber
Next up is a not an energy commodity, but is one of our favorite commodities….chocolate. Or in trader-talk, cocoa. Cocoa is currently making headlines, due to some blatant market manipulation by a British hedge fund led by Anthony Ward. Last week he bought 241,000 tons of cocoa beans, which is enough to manufacture 5.3 billion quarter-pound chocolate bars. The transaction was the single largest cocoa trade in 14 years, and unsurprisingly caused prices to rise. Prices have since fallen in the last day, but with the power to potentially force manufacturers to raise the price of chocolate bars, cocoa is like Buzz Lightyear, as we could see prices head to infinity…and beyond.
UK Nat Gas
There’s not much to say about first-month NBP UK natural gas, except that it continues to make other-worldly moves, rising a stellar 48% on the prompt month for Q2 this year, only to rip 21% lower since early July. Referred to as avant garde jazz on the burrito previously, we update this analogy as UK nat gas gives us as much cohesion sometimes as a three-eyed alien. So while we come in peace, let’s move on swiftly.
From limber lumber to lumber the tumbler
The next non-energy commodity to be sliced and diced is lumber, hence its blunt analogy to…Woody. Lumber is making headlines for very different reasons to enemy-then-buddy Buzz Lightyear (i.e., cocoa). Lumber steadily increased in value throughout 2009 and into 2010, as the economic downturn forced the closure of lumber mills and increased lumbers scarcity. Now, just as mills start to come back online, cracks are re-appearing in the economic foundation. This has been highlighted most recently by remarkably poor housing data. Hence, as the chart glaringly illustrates, lumber prices are getting the whoop-bang-wallop treatment.
Darth Tater
Last, but by no means least, we come to my favorite character in Toy Story; the one, the only, Mr Potatohead. In Commodityworld(tm), Mr Potatohead represents our dearly beloved US natural gas, as unconventional plays such as shale and LNG are changing the face of the natural gas complex. As technology develops, we will see these changes continue over the next decade or three, to where the market will look unrecognizable to what it once was.
So, on that note, I bid you farewell, and leave you to dwell on the analogies laid out before you. And as Darth Tater would say, may the force be with you.
