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Oil dominates commodity traders' minds – The Australian Financial Review

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The likely extension of OPEC and Russian production will influence the oil price.

by Alexandra Cain

There has been plenty of interest among CFD traders in oil and copper recently, with both cyclical and systemic factors affecting these markets. These trends should provide opportunities for commodity traders for the rest of this year and into 2018.

“People are reassessing the oil price in light of the likelihood OPEC and Russia will extend their production cuts through next year,” says Ric Spooner, chief market analyst, CMC Markets.   

The rising copper price has been driven by synchronised global demand for this commodity from most major economies and as a result of strong housing markets.

“A relative lack of investment near-term in mining production and a deficit forecast for copper in 2018 should help keep prices high,” says Spooner.

Chris Weston, chief market strategist with IG has also seen heightened activity in oil CFD trading.

“Investors are playing the price of Brent crude oil to express the potential of a future extension on the OPEC and Russia oil quota agreement, while US crude oil has been influenced by an improving trend in falling inventory data.

“We have seen a number of our commodity-focused clients playing the widening spread between the price of Brent and West Texas Intermediate oil, going long Brent and short WTI,” he says.

Gold and copper CFDs have been well traded by Weston’s clients. But he says gold “is simply a slave to the US dollar and Japanese yen trade and when we see moves in this currency pair we tend to see gold doing the inverse.

“Copper, along with base metals like nickel, have responded to improved supply and demand dynamics and a fairly upbeat message about the global growth story,” he says.

Adding diversity

Ilan Israelstam, head of strategy, BetaShares, says accessing commodities using ETFs can provide diversification to portfolios.

He notes investing in commodities used to be much more difficult. Before traders could easily access commodity ETFs and CFDs they typically invested in futures, which are harder to access and require high minimum investment.

Alternatively, investors might have, where possible, attempted to buy the commodity directly, generating high storage and other costs.

“Commodity ETFs, by contrast, provide investors with exposure to the price of commodities as simply as buying any share on the ASX. Commodity ETFs are now available offering exposure to precious metals, oil and agricultural commodities,” say Israelstam.

At the moment, BetaShares’ clients are buying oil ETFs. Israelstam also notes oil prices have recently been rallying and investors have sought access to this commodity as its price has fluctuated.

“Oil ETFs have become quite heavily traded by investors, some of whom are using the product for short to medium-term trades,” he says.

Gold bullion ETFs are also popular, with some investors choosing to include gold as part of a balanced portfolio. There is a number of ASX-traded gold bullion ETFs available to investors.

For example, BetaShares Gold Bullion ETF gives investors access to physical gold bullion held in a secure vault via an ASX trade. But broad commodities ETFs will also give investors some exposure to gold.

Active monitoring

Israelstam notes that as some commodity investments can be quite volatile, the primary way for investors to manage risk is by actively monitoring these investments rather than buying and holding.

“This is particularly important for products that offer exposure to a single commodity, rather than a basket,” he says.

In addition, virtually all commodities are priced in US dollars, so investors should be aware of the impact of currency movements on their investment performance.

With the continued innovation in ETFs, a number of products have been launched that are currency hedged, so investors are getting purer commodity exposure and are not exposed to foreign exchange fluctuations impacting the value of their investments.

“This is particularly important as historically commodities have risen in price at the same time that the Australian dollar has appreciated relative to the US dollar,” Israelstam says. “Without such a hedge in place, this can mean that lifts in commodity prices can be offset by declines in the US dollar.”

Turning to the minor commodities, Spooner says the price of US lumber has risen by 42 per cent this year. “This has been driven by the strong housing market, the potential for the imposition of tariffs by the US on Canadian exports or imports into the US.”

Palladium has been a strong performer among the commodities as well. “It’s run very hard this year, it’s up 45 per cent because apart from its precious metal demand it’s benefited from an increase in motor vehicle sales and production, and stricter emissions levels,” he adds.

Forward premiums

When trading commodities it is important to be aware there can be a significant difference in the forward premiums, the price paid now for a commodity compared to its future price.

“You need to be very conscious of that when trading commodities as it can work in your favour or against you. It can work against you if you’re bullish about a commodity and lock in the spot price. It may be everybody is thinking the same way, which means the price of the commodity in six months will be well above the current price. In this situation you will receive less upside if you’re right and a lot more downside if you’re wrong,” says Spooner.

But the same situation can work in your favour if the opposite applies and the market is priced out into the future in the opposite direction you think it will go. Then traders have a greater potential for reward and potentially less risk.

“Either way the forward pricing is built-in and you need to actively manage the rollover of contracts from one month to the next, and be very careful to make sure that you’re aware of what’s going on in the market and how that might impact your position,” Spooner warns.