Coffee and crude futures 'acting like sisters'

by Agrimoney.com

The two have colour in common. Both have a dark brown hue.

But that's about all. One is a liquid mineral that keeps us on the move. The other is a crop, a bean that keeps us awake.

So why should futures in crude oil and coffee have started moving as a pair? The duo have been named as the latest odd couple in commodities, following copper and wheat, and gold and farmland.

'Like sisters'

The convergence between crude and copper, both of which were showing small gains in early deals on Friday, has been noted on both sides of the Atlantic.

"A savvy old school trader points to coffee and crude prices acting like sisters," Jurgens Bauer at US-based PitGuru said.

In London, broker Marex said the correlation between the two assets was "particularly tight".

"Crude topped on May 2 and then fell 22%. Coffee topped on May 3 and then fell 22%.

"Crude has since put in a bottom on May 23 and then retraced 8.2%, and coffee put in a bottom on May 23 and then retraced 11.5%.

"The correlation between coffee and crude even goes down to the hourly charts."

Risk-on, risk-off

And this when cold weather in Brazil has, apparently, been having a big impact on coffee prices too, for fear of frost damage. Is a cold snap in the South American country big enough to move oil markets too?

The coupling looks like the latest anomaly thrown up by ultra-loose US monetary policy encouraging waves of money into financial markets, and dividing days between "risk-on" ones, when the likes of commodities and shares gain, and bonds fall, and "risk-off" ones, when caution prevails and the directions alter.

Indeed, Marex highlighted a price correlation between coffee and "all risk assets".

And, in theory, this will erode when borrowing costs rise and investors swap a shotgun approach for a rifle.

"When the money tap is turned off, these things are going to stop moving as a herd," a London-based macroeconomic analyst told Agrimoney.com.

Speculator sell-off

That thesis sounds reasonable.

Except in coffee, in which speculators have already been selling down holdings for a year, even as prices reached multi-decade highs in the spring, and now have only a small net long position. Index-tracking funds started selling even earlier, although not as enthusiastically.

Which makes it appear that it is not fast money, nor a wall of money, which is pulling coffee's strings.

So what is? It may be that the surge in interest in coffee, even in developing countries, has tied it more closely to world economic sentiment. If so, the crude-coffee coupling may last a little longer yet.

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