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Post: Commodities Corner: Commodities offer traders a wild ride, but some are drawn to volatility like flies ‘to a light bulb’

Traders have had a lot to deal with since Russia’s invasion of Ukraine, as sanctions ramp up and threaten the global flow of commodities, including wheat and oil, raising the risk of shortages and wreaking havoc on day-to-day trades that have seen some explosive moves.

“We’re in a very ‘headline driven’ market right now that makes managing risk of extreme importance,” John Caruso, senior asset manager at RJO Futures told MarketWatch. There was a lot of “hot money” chasing the recent rallies in energies and metals on the Russia/Ukraine and inflation headlines, and “I’m sure they’re not too pleased with those decisions today.”

Oil futures
CL.1,
+9.63%

CLJ22,
+9.63%

BRN00,
+0.80%

BRNK22,
+0.80%

on March 8 settled at their highest levels since 2008, gold
GC00,
+1.66%

GCJ22,
+1.66%

topped $2,000 earlier this month to trade at 19-month highs, and prices for wheat
W00,
+2.15%

WK22,
+2.15%

in Chicago, and palladium
PA00,
+5.61%

PAM22,
+5.61%

and copper
HG00,
+2.09%

HGK22,
+2.09%

on Comex, recently saw their highest levels on record.

Read: Gold near record-high prices has become a costly haven for investors

Also see: Palladium prices climb to a record as Russia-Ukraine war looks to deepen supply deficit

“While commodity price hikes and declines often stem from single triggers, today’s confluence of uncertainties regarding Russia-Ukraine geopolitical developments, supply chain bottlenecks and [Federal Reserve] policy are creating a commodities price roller-coaster for investors,” said Greg Bassuk, chief executive officer at AXS Investments in New York. 

Prices for nickel hit a record high on the London Metal Exchange, with an unprecedented price surge leading the exchange to suspend trading on March 8. LME nickel trading resumed on March 16, with a new daily limit move in place, leading to snags in trading.

There have been short squeezes in many commodities and “there are times where the speculative position gets totally out of whack with a commodity that’s in short supply,” said Phil Flynn, senior market analyst at The Price Futures Group. Given the current extreme conditions in commodities trading, “we’re going to see more of this in the future.”

However, Flynn doesn’t believe these big moves take away from the trust level in commodities trading. “Players that have been around for a long period of time understand that these short squeezes happen.”

The “high volatility has caused some oil traders to go to the sidelines,” he said. Increasing margins, the amount of money investors must put up to be able to trade and hold futures contracts, have also played a part in reducing some trading volume numbers, said Flynn.

However at The Price Futures Group, “we’re seeing an uptick in interest of people wanting to get involved,” he said, though that may not have, at this point, fully shown up in commodities trading volume.

Some traders are actually drawn to volatility like flies “to a light bulb.”


— Phil Flynn, The Price Futures Group

Some traders are actually drawn to volatility like flies “to a light bulb,” said Flynn. Some may come in on short-term swings, but traders are “becoming a lot more cautious and taking risk off the table.”

That’s been particularly difficult as sanctions on Russia threaten global supplies of a wide variety of commodities. The U.S. banned oil and natural-gas imports from Russia, and western nations have removed some Russian banks from the SWIFT international payments system. Russia, in turn, has announced a ban on exports of some commodities and raw materials.

“Clearly, threats of shortages for commodity goods, particularly oil, wheat, and strategic metals have scared up prices dramatically and will likely continue to do so, so long as the tit for tat sanctions game continues between Washington D.C. and Russia,” said RJO Futures’ Caruso.

Russia is among the world biggest exporters of oil and natural gas
NG00,
+3.89%

NGJ22,
+4.09%

and the top exporter for wheat. It’s also among the biggest producers of palladium, gold, silver
SI00,
+3.16%

SIK22,
+3.16%
,
copper and nickel. Ukraine, meanwhile, is a key producer of grains.

Read: USDA says Russia’s actions raise uncertainty for agricultural supply, cuts world wheat export estimate

Also see: Why Russia’s invasion of Ukraine lifted uranium prices to their highest in over a decade

“Investors should keep a close eye on Russia-Ukraine developments given that region’s status as a large global supplier of commodities,” said Bassuk.

For now, investors are reacting to a “variety of signs in determining whether commodity prices are on the one hand at a bargain or, by contrast, overly steep,” he said.

Total trading volume on the CME has “exploded,” said Caruso — up 25.7% year to date as of February, compared to the same period a year ago. “Idle commodity traders have re-established already existing accounts” at RJO Futures, he said.

Still, Caruso pointed out that it’s a challenging market for commodities traders. It’s “nearly impossible” to manage a 36% decline in crude oil that’s followed by a 26% decline on a week over week basis, he said.

Read: Oil suffers ‘spectacular’ collapse, enters bear market just 5 days after settling at nearly 14-year highs

For those coming to us for advice, “we’ve recommended cutting their trade allocations down by [one-fourth] of their typical volume as an exercise in risk management,” said Caruso.

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