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Commodities in October – Waiting Patiently for a U.S.-China Trade Deal

The broad commodities market rose modestly in October. The S&P GSCI was up 1.2% for the month and up 10.0% YTD. The Dow Jones Commodity Index (DJCI) was up 1.9% in October and up 6.7% YTD. Gains were spread surprisingly evenly across the individual commodity markets

As has been the case all year, the star performer in the petroleum complex in October was gasoline; the S&P GSCI Gasoline was up 5.2% for the month, driven by unscheduled refinery outages in the U.S. as opposed to particularly strong consumer demand. Despite a brief pick up in prices in October (S&P GSCI Natural Gas up 3.6%), the natural gas market remains mired in oversupply, with production growth continuing to outpace domestic consumption and export opportunities. U.S. natural gas stocks have pushed above the five-year average despite lower prices and a sharp drop in the number of rigs drilling for gas.

As the annual LME Week in London came to an end, the majority of metals across the industrial complex ended higher in October on the back of trade war resolution hopes and labor strikes in Chile. The two exceptions were S&P GSCI Iron Ore and the S&P GSCI Nickel, which were down 5.9% and 2.1%, respectively, but both were still up near 60% YTD. Nickel mines in Indonesia agreed on Oct. 28, 2019, to stop nickel ore exports immediately, pulling forward the already expedited January 2020 deadline. After nickel prices moved higher by 24% in August, a period of consolidation is understandable.

Palladium outperformed in the precious metals space in October on the back of a glaring supply shortfall. The platinum to palladium ratio is at the lowest in the last 25 years, reflecting the strength of the palladium market; the S&P GSCI Palladium was up a solid 6.7% in October and up 50.4% YTD. The S&P GSCI Gold continued its slow march higher, adding 3.0% on the month and up 17.6% YTD, driven higher by catalysts such as the U.S. Fed’s third rate cut and the Diwali festival in India.

The agriculture complex continues to wait patiently for positive news on the U.S.-China trade war front. The S&P GSCI Agriculture was up 1.4% in October. China has been back in the U.S. soybean market, although to a lesser degree than before the trade war, but the two countries are still finalizing a “Phase 1” trade pact that many expect will boost U.S. agriculture exports to China, particularly soybeans. The S&P GSCI Cotton ended the month up 6.1% on concern regarding the condition of the U.S. crop due to poor weather during harvest. The newly launched S&P GSCI Skim Milk Powder also ended the month in positive territory, up 5.1%, continuing to benefit from strong global milk powder demand.

It was a mixed bag in the livestock sector in October; S&P GSCI Lean Hogs was down 9.0% while S&P GSCI Live Cattle rose 6.4%. Volatility in the lean hog market continues, as market participants flip between focusing on the devastating supply cuts caused by African swine flu in China and the export-depleting drag of the ongoing U.S.-China trade war.