Commodities have been stalling for weeks, and now the bears are moving in from a variety of angles.
The price action marks a contrast from 2016, when steelmakers, oil drillers and gold miners outperformed the broader market by a wide margin. This year, however, industry observers are pointing towards supply gluts of key materials and higher interest rates.
The Federal Reserve is another potential concern for the sector, with policymakers widely expected to raise interest rates at their next meeting on March 15. That has the potential to hurt commodities because it can lift the U.S. dollar, against which metals and oil are priced. As reported last week, some large traders have already positioned for higher rates.
First is Rio Tinto (NYSE: RIO). A large option trade was detected in the global mining giant, with 32,000 March 40 puts purchased for $0.55 to $0.70. Puts fix the price where investors can sell a security, so they tend to appreciate in value when shares decline, or expire worthless if they do not.
Yet appreciate in value they did yesterday, as RIO was up slightly when the trade appeared, but then quickly slid 2 percent, shooting the value of those contracts up more than 30 percent to $0.95.
RIO, which has operations on every continent except Antarctica, closed 1.77 percent lower at $39.90, and is down 15 percent from a long-term high above $47 in mid-February. The decline comes amid industry expectations that iron ore prices may fall more than $20 per ton from current levels around $89.1 Copper has also been under pressure as inventories mount in China.2
The second is in the energy market, where crude-oil futures yesterday plunged more than 5 percent to their lowest level since late November after stockpiles rose much more than expected -- their ninth straight weekly increase.3
There was also put activity in Whiting Petroleum (NYSE: WLL), a debt-laden Rocky Mountain driller. This time, over 5,500 April 9 puts traded for $0.43. The stock fell 10 percent to $9.37 and will have to lose another 10 percent of its value by the middle of next month for the puts to double.
Overall option volume was more than seven times the monthly average in RIO on Wednesday, with puts outnumbering calls by 10 to 1. WLL’s activity was also slightly above normal levels and skewed to the downside.
Bottom line: Option activity suggests some traders feel the good times are over for key commodities industry players.
1. Mining.com: Iron ore price drops to 1-month low, coking coal rebounds. 3/6/17
2. DailyMail.com: London copper sits near four-week trough as stocks weigh. 3/6/17
3. Reuters: U.S. crude stockpiles soar, gasoline inventory plunges: EIA. 3/8/17