Commodities & Metals

Commodities Watch: Margin Increases, Possible Flooding Hit Crude; Growers, Traders Watching the Weather; Platinum Forecast at $1,925 in 2011 (CME, SWC, PPLT, PGM)

Today’s commodities news starts with a rise in margin requirements on crude oil contracts, and then looks at weather effects on both crude oil refining and US grain prices. We conclude with a look at the forecast for 2011 for the platinum group metals.

The CME Group Inc. (NASDAQ: CME) has raised margin requirements for crude oil futures contracts, effective today. Contracts for WTI crude on the Nymex have risen from an initial speculative rate of $6,750 to $8,438, and the maintenance rate has risen from $5,000 to $6,250. That’s a jump of about 25% on a 1,000-barrel contract. Hedging rates also went up, from $5,000 to $6,250 for both initial and maintenance bids.

Perhaps the surprising thing is that it still costs so little. The initial rate increase amounts to barely 8% of the cost on a speculative bid on oil priced at about $100/barrel. The impact on crude traders was brief, as WTI crude prices dipped below $100/barrel early this morning, but have fought back to near $103/barrel.

One also has to wonder if CME will raise margins again in an effort to cool off volatility in the crude market. A large rise in the margins could drive off some of the speculative positions in WTI crude, but the danger to CME is that lower margins on the ICE will attract CME’s traders. The CME also has to be careful that it doesn’t whip up a political storm, where politicians once again take aim at speculation in the crude markets.

Gasoline prices could also feel the effects of flooding along the lower Mississippi as some refineries may be shut down as the floodwaters flow south. A refinery shutdown will almost certainly lead to a rise in the price of crude as well as refined products. That’s a little weird since the refiners won’t be processing crude it makes little sense that the price of crude should rise. But that’s the oil market.

The floodwaters and other weather events are also bearing down on grains. Global corn reserves are expected to be forecast at a four-year low tomorrow by the US Department of Agriculture. Corn planting has now hit about 40% of expectations, as farmers rush to get the crop into the ground before mid-May. Corn prices are up less than 1% today, to around $7.14/bushel as buyers wait to see what the weather has in store.

Wheat prices are up about 2%, to around $8.06/bushel in Chicago, as spring wheat planting proceeds at its slowest pace in nearly 20 years. Just 22% of the US spring wheat crop was in the ground as of May 8. Cold, wet weather gets the blame for the drop from an annual average of 61% planted by now.

Finally today, metals consultants GFMS Ltd. have forecast a rise in platinum prices from their current level of about $1,800/ounce to $1,925/ounce by the end of the year.  This in spite of the fact that a surplus of the metal is expected again this year.

GFMS attributes the rise in platinum prices to investor activity, not industrial demand. The firm said that 550,000 ounces of platinum were purchased for ETF investment in 2010 and that retail investors purchased another 76,000 ounces.

The ETFS Physical Platinum Shares ETF (NYSE: PPLT) is trading this afternoon up slightly at $178.60, within a 52-week range of $148.26-$186.69. The iPath DJ-UBS Platinum Total Return Sub-Index ETN (NYSE: PGM) is also up slightly at $42.17, within a 52-week range of $34.82-$44.57.

Paul Ausick