It has been a tumultuous year for commodities, battered by turbulent global markets, bearish sentiment over the Chinese economy and a strengthening U.S. dollar. Concerns over waning demand from China – the world’s top consumer of raw materials – has weighed heavily on commodities in 2015. But gains across a number of energy and materials stocks last Friday has provided hopes of a much-needed rebound in the beleaguered commodity space.

The Commodity Bloodbath

Commodities have been on a roller-coaster ride this year continuing the bloodbath seen in 2014, hobbled by concerns that a possible hard landing of the Chinese economy would wane the country’s appetite for raw materials, from oil to metals to cotton. Economic cooling in China has cast a dark shadow over the commodity markets. A downturn in the country's housing market, persistent credit crunch, overcapacity, a flagging export sector and weak infrastructure investment are hurting the world’s second-largest economy.

Adding to the pain is the rally in the greenback which is making goods priced in the U.S. dollar more expensive for other currencies, mostly for developing countries with weak currencies. The U.S. dollar, which is at multiyear highs vis-à-vis rival currencies, typically has an inverse correlation with most commodities.

Commodities were hammered in August amid fears of a slowing Chinese economy. China’s move to devaluate its currency in an effort to crank up its sleeping economy and lift up exports sent tremors across the commodity space, raising concerns about the country’s buying power of U.S. dollar-denominated commodities. Fears of weakening demand from China amid a growing supply glut led to a broad-based meltdown in prices of commodities with oil taking the most assault.  

Oil prices have been under significant pressure over the last year and a half on concerns over the health of China’s economy, a stronger dollar and surging crude oil production in an already oversupplied market. The absence of a production cut by oil cartel OPEC coupled with booming U.S. production have led to the oversupply, thus hurting oil prices. West Texas Intermediate (WTI) crude oil is down roughly 22% so far this year while Brent crude, the global benchmark, has lost around 25% over the same period.

Gold has also suffered similar fate with prices sliding roughly 4.4% year-to-date. Uncertainty surrounding a Federal Reserve interest rate hike and a strengthening dollar have kept the yellow metal under extreme pressure. Prices of copper – a major industrial metal – has also tanked roughly 17% so far this year on China’s shrinking demand for the red metal, supply glut, apprehensions surrounding Europe and continued dollar strength.

Rebound in the Cards?

A rise on Oct 2 across a number of commodities has ushered in hopes of a reversal of this bear trend in the final quarter of the year. A number of stocks in the commodity space racked up handsome gains last Friday, especially those dealing in oil and metals.

WTI crude rose 2.06% to close at $45.66 a barrel on the New York Mercantile Exchange last Friday. Brent crude finished 1.03% higher at $48.18 a barrel. The gain came on reports of a decline in the number of working U.S. oil rigs to a five-year low (indicating drilling cutbacks by U.S. producers) and mounting tensions in Syria resulting from Russian air strike campaign. The lower rig count provides a cue of a decline in the U.S. oil production in the near term, a welcome news for the beaten up energy space.

Gold, on the other hand, notched up a more than 2% gain on Oct 2 as lackluster September U.S. employment data led to speculations that the Federal Reserve might delay in raising interest rates. The jobs report – a key measure of U.S. economic health – showed that the economy added just 142,000 jobs during last month, way below 200,000 additions expected by economists, diminishing the likelihood of a rate hike in the near term. Gold prices (for December delivery) on the New York Mercantile Exchange’s Comex division gained 2.15% to close at $1,137.60 an ounce after closing in the red in the previous five trading sessions.

The Fed, last month, stayed put on its decision of not raising rates due to worries surrounding slowing global economic activity and excessively low inflation. Gold had rallied following the Federal Open Market Committee (FOMC) meeting, capitalizing on its safe haven status amid down equity markets and after weak U.S. economic news.

The disappointing job data, which also caused a sharp decline in dollar against key rival currencies, has left investors anticipating that a rate hike would not come until 2016. This could act in favor of gold, which has a negative correlation with interest rates. A hike in interest rates tends to boost returns from income generating assets and thus hits non-yielding commodities including gold.

Among other metals, prices of silver jumped around 5% to settle at $15.235 an ounce after getting a boost from the weak employment report. Prices of copper for December delivery also moved up roughly 1.8% to $2.345 per pound on the New York Mercantile Exchange last Friday. Copper prices are expected to find support from a supply cut from the Collahuasi mine in Chile, one of the world’s biggest copper mines. The mine, which is owned by Anglo American and Glencore, announced last week that it will cut output by 30,000 tons amid a difficult market scenario.

5 Stocks Rallying in October

A number of companies saw their stocks prices head north along with an uptrend in the prices of commodities they deal with. We highlight 5 such commodity stocks below that are gaining in October, all of them sporting a Zacks Rank #3 (Hold).

Agnico Eagle Mines Ltd. AEM

Toronto, Canada-based Agnico Eagle is a gold producer with mining operations in Canada, Mexico and Finland, and exploration activities in Canada, Europe, Latin America and the U.S. In addition to gold, it also produces silver, copper and zinc.

The gold miner’s shares shoot up roughly 12.6% on Oct 2, closing at $27.81. Agnico Eagle maintains a solid exploration budget and is reinvesting in its assets to expand output. The company's move to jointly acquire Osisko Mining Corporation with Yamana Gold will also boost its production profile and improve cost structure.
 
Encana Corporation ECA

Calgary, Alberta-based Encana is engaged in the exploration and production of natural gas, oil and natural gas liquids. It is the second-largest gas producer in North America, and holds a highly competitive land and resource position in a number of the region's most promising shale and tight gas resource plays.

The oil and natural gas producer’s shares got a lift from higher oil price, climbing roughly 8.3% to close at $7.18 last Friday. Encana has one of the largest natural gas resource portfolios in North America, providing a diverse and high quality inventory of reserves. The company’s cost reduction initiatives are encouraging as seen from its decreasing drilling and completion cost. Additionally, the actions taken by Encana to divest high-cost low-profit assets increase its financial flexibility.

Freeport-McMoRan Inc. FCX

Phoenix, AZ-based Freeport-McMoRan is engaged in exploration and development of copper, gold, molybdenum, silver, and other metals, as well as oil and gas. It is the world’s biggest publicly-traded copper producer.

Freeport’s shares climbed roughly 8.2% on Oct 2 to close the day at $10.62. Freeport has a positive long-term outlook for its business, considering the limited supplies of copper and the metal’s growing demand in the global economy. The company is also attempting to cope with weak market conditions in the near term by delaying investments and adjusting operations to maximize its current cash flows.

Newmont Mining Corporation NEM

Colorado-based Newmont is one of the world's largest producers of gold with several active mines in Nevada, Peru, Australia/New Zealand, Indonesia and Ghana.

The miner’s shares ripped higher along with a rise in gold prices, popping 7.8% to close at $17.07 last Friday. Newmont is making notable progress with its growth projects that are expected to boost its production performance. It is also progressing with its cost and efficiency improvement programs.

TOTAL S.A. TOT

France-based TOTAL is among the top five publicly traded global integrated oil and gas companies based on production volumes, proved reserves and market capitalization with operations in more than 130 countries.

The company was among the notable gainers in the energy space on Oct 2 with shares rising 4.5% to $47.20. TOTAL has one of the best production growth profiles among the oil majors having the lowest exposure in mature North American markets. Consistent investments to develop its global assets are expected to boost its production.

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