Why Commodities Prices Are Plunging Once Again

Commodities are plunging—again.

The same worries are resurfacing: concerns about lower growth in the U.S. and China, uncertainty about sovereign debt issues in the euro zone, and higher margin requirement in some commodities.


China's inflation eased somewhat in April and its industrial output growth slowed down more than expected last month.

Greece's debt crisis and rising inflation risks in Poland and England have increased concerns about euro zone economies, causing a sharp sell-off in the euro and spike in the dollar.

And late this afternoon, the CME Group announced it will raise margin requirements on gasoline contracts, following steep increases in silver margin rates over the past few weeks.

It's like deja vu — a repeat of last week's rout.

Oil settled down over $5, just above $98, silver is down $3, copper is at its lowest level since last December.

Gasoline futures, which fueled today's slide in energy commodities, plunged over 7 percent. Trading in crude oil, gasoline and heating oil futures was briefly halted after June RBOB gasoline futures fell 25 cents, reaching the daily price limit and triggering circuit breakers at the New York Mercantile Exchange to stop trading in those energy commodities.

It was the first time trading was halted during the open-outcry session since September 2008. Gasoline futures fell further once the trading halt was lifted and the daily price limit on petroleum futures for Wednesday’s trade was raised by 200 percent.

Volatility in the gasoline market this week has been extreme and unprecedented, at least in recent years. Gasoline futures have moved by 25 cent or more in two of the last five trading sessions.

Meanwhile the RBOB gasoline crack, the spread between gasoline and oil futures which reflects refiners' margins, jumped over $10 in a week to over $40 a barrel on Tuesday before plunging below $32 today.

To quell volatility in commodities, the CME Group is raising margins again.

Speculators’ (hedge funds and financial firms) initial margin rates on RBOB gasoline futures will jump 21.4 percent to $11,475 and initial margin requirements on the RBOB crack spread spike 50 percent to $4,950, effective close of business Thursday.

Traders forced to meet margin calls has caused some of the selling in commodities over the past two weeks. But there also has been a change in sentiment.

From global perspective, the short dollar, long euro, long commodities trade is starting to unwind on concerns about a slowdown in global growth, rising inflation and interest rate hikes. Domestically, for now, the U.S. energy market is now more worried about the impact of high prices on consumer demand than the potential impact of Midwest floods on petroleum supplies.

The latest data from the U.S. Energy Department shows the 4-week average for gasoline demand is down 2.4 percent from where it was a year ago. Gasoline supplies unexpectedly rose last week, where most analysts were looking for a sharp decline due to refinery outages and pipelines issues.

The surprisingly bearish report on petroleum inventories, particularly gasoline, simply exacerbated the sell-off in energy commodities.