In a move that surprised many investors, the U.S. Federal Reserve announced plans to begin cutting its $85-billion-a-month bond-buying program.
The Fed tried to temper the move by suggesting its key interest rate would stay low for longer than previously promised.
The taper decision followed a scheduled meeting of the Federal Open Market Committee (FOMC) meeting Dec. 17-18.
The central bank said it would reduce its monthly asset purchases by $10 billion to a total of $75 billion. It cut equally from mortgage and treasury bonds. The investment community was divided as to when it expected the Fed to start cutting back its bond-buying package. Many thought tapering would begin in March.
The Fed’s decision signals a vote of confidence in the U.S. economy and, as expected, triggered a rise in the U.S. dollar against other currencies. As copper and other base metals are priced in dollars, they become less attractive as an investment to those investors holding other currencies.
Three-month copper on the London Metal Exchange (LME) hit its strongest in almost two months at the beginning of the week as the market focused on nearby supply tightness and falling inventories of the red metal. The benchmark copper closed 0.5 percent up on Dec. 16 at $7,290 a tonne after earlier climbing to $7,307.70, its highest since Oct. 23. However, by midweek the three-month metal was $60 down at close to $7,230 a tonne.
Gold, which has been supported by the Fed’s bond-buying, initially held up surprisingly well following the tapering decision. The yellow metal for February delivery on the Comex division of the New York Mercantile Exchange (Nymex) was down just $4.90 on the day to $1,235 an ounce by close on Dec. 18.
However, the following day, the precious metal slipped below $1,200 an ounce for the first time since June, with February gold at $1,193.50 at 13:30 EST. Last week, February gold hit a three-week high of $1,261.10. Overall, the precious metal has seen a 27-percent loss in value this year, marking its first annual decline in 13 years.
Crude oil prices initially moved higher at midweek after markets absorbed the Fed’s tapering decision, in the belief that an improving U.S. economy could lead to increasing crude demand in the world’s biggest oil-consuming country. But crude came under pressure Thursday amid a rising U.S. dollar on the back of the tapering stimulus.
A strong U.S. dollar is a negative for oil as it makes oil expensive to buy for holders of other currencies. However, the unfolding crisis in South Sudan provided some support for oil prices, re-igniting supply concerns in a market already worried about Libyan supply disruption.
Light, sweet crude for January delivery — the West Texas Intermediate (WTI) — traded at $99.38 a barrel on Nymex at 13:30 EST on Dec. 19, having finished at $98.06 the previous day.
Brent North Sea crude for February delivery on ICE Futures Europe, meanwhile, was back above $110 a barrel at 13:30 EST, after closing at $109.63 the previous day. Earlier on Dec. 18, February Brent touched $110.47 a barrel.
The U.S. Energy Information Administration (EIA) on Dec. 18 reported that domestic crude stockpiles declined by 2.9 million barrels last week, a slightly higher figure than analysts expected.
But at 372.3 million barrels, U.S. commercial crude inventories are still at the highest level for the week since EIA records began in 1982. The burgeoning supply is due largely to the rapid increase in the country’s crude production over the past five years as a result of improvements in horizontal drilling and hydraulic fracturing technology – commonly known as fracking.
U.S. crude production is now running at more than 8 million barrels per day, and according to the EIA grew 17 percent to a 25-year high in the past 12 months. Domestic output will grow annually by an average 800,000 barrels a day to 9.5 million barrels in 2016, nearing the record of 1970, the energy department’s Annual Energy Outlook for 2014 report said. U.S. crude output reached an all-time high of 9.6 million barrels in 1970. After 2016, U.S. crude oil production is expected to level off and then slowly decline after 2020, according to EIA.
Arabica coffee futures continued to strengthen with beans for delivery in March on New York’s ICE Futures U.S. exchange reaching a fresh four-month high of $1.162 a pound on Dec. 19. March had settled at 115.80 cents the previous day. Traders said concern about ongoing slow sales of beans out of top robusta-producing country, Vietnam, and low stockpiles of beans in NYSE Liffe-approved warehouses are weighing on the arabica market.
Robusta coffee was trading at lower levels this week following last week’s peak. The March contract on London’s NYSE Liffe hit $1,813 a tonne on Dec. 13, the highest level for the second month since late August. The rally came amid these concerns. Inventories in NYSE Liffe-approved warehouses fell to 31,420 tonnes as at Dec. 9, according to NYSE Liffe data, marking the lowest inventory since at least 2002.
However, signs of a pickup in selling from Vietnam triggered by the higher prices contributed in part to this week’s pullback, analysts said. Robusta coffee futures for March delivery on NYSE Liffe were down to $1,699 a tonne by close on Dec. 18.
Sugar futures prices extended losses to touch their lowest in three years in New York and London this week as bumper harvests gathered pace in Brazil, India and Thailand, further boosting global oversupply.
Raw sugar for delivery in March dropped to 15.86 cents a pound on ICE Futures U.S., the weakest level for the front-month contract since July 2010, before recovering to 15.89 cents by close 18 Dec. White, or refined, sugar for delivery in the same month on London-based NYSE Liffe settled at $433.35 a tonne on Dec. 18 after earlier dipping to $432.50, the lowest level for the front month since May 2012. Most analysts believe there is little to indicate the supply pressure on prices will be alleviated anytime soon.
Cocoa, meanwhile, moved higher on continuing supply concerns. Cocoa for March delivery on ICE Futures U.S. settled at $2,780 a tonne on Dec. 18, up $10.5 on the day and just $64 off its two-year high of $2,844 a tonne reached on Dec.3. Liffe cocoa in London, meanwhile, settled at £1,772 a tonne at midweek, and just £16 short of the two-year peak of £1,788 a tonne hit last month.
Cotton continued to edge up on the tighter outlook for supplies this season from top exporter, the U.S. The most-active March contract on ICE Futures U.S. settled at 83 cents a pound on Dec. 18, its strongest in eight weeks.
Agri commodity markets are expected to be more stable in 2014, in contrast to the volatility of most agri markets over the past decade, according to Netherlands-based Rabobank.
The bank said in its Agri Commodity Markets Outlook 2014 report, “2014 is shaping up as a relatively balanced year for most agri commodities. Record prices and extreme volatility, which have typified agri markets since the early 2000s, look set to be replaced by more balanced fundamentals, and consequently narrower trading ranges in some, if not most, markets in 2014.”
The bank reported that global inventory levels have been rebuilding throughout 2013, and the rapid demand growth of recent seasons has slowed.
“Agri commodity markets are expected to face headwinds as supply rebuilds, pressuring prices during 2014 and driving a rebalancing of acres in the 2014-2015 season,” Rabobank warned.
Cocoa futures are seen as the likely best performer, with the bank expecting prices to increase 12 percent as consumption continues to outstrip production for a third successive season, drawing down on stocks. Rabobank said ICE cocoa may climb as high as $3,050 a tonne on average in the fourth quarter of 2014, up from the $2,730 average for the last quarter of the current year.
For sugar, meanwhile, the bank expects the sweetener to “transition into a deficit year of production in 2014-2015, driving prices higher in the second half of the year.” ICE sugar may reach 18.8 cents a pound on average in the final quarter of next year compared with the 17.8 cents average for the fourth quarter of 2013, Rabobank indicated.
However, it was more downbeat on some of the other agricultural commodities.
While cotton futures should remain firm in the first half of 2014, they will ease later in the year as U.S. acres increase in the 2014-2015 season due to weaker alternate summer crop prices, according to the bank.
On coffee, following a strong year of production in 2013, Rabobank expects arabica prices to experience “further downside” during 2014, which, it said, would drive ending stocks higher, while currency weakness will continue to pressure producer prices. Robusta prices likely will also weaken during the first half of 2014, following a record crop in Vietnam.
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