Commodities Weekly

Commodities as An Asset Class: According to the rules governing the DBLCIMeanReversion Enhanced, the index is building an underweight allocation tocrude oil. This implies valuation risks are increasing in an environment ofstrong US crude oil production growth and rising OPEC spare capacity.

    Energy: We view Q2 and Q3 US natural gas prices as too low to incentivise themaximum degree of utility demand switching. This together with a lowerlikelihood of upside supply surprises suggests that it will be difficult to narrowthe storage deficit and that anxiety over US storage levels will continue,particularly in the event of hotter-than-normal summer weather.

    Precious Metals: Based on our calculations and given our bullish US macrooutlook we see the potential of a further 200 tonnes of gold ETF liquidation.

    History would suggest that this would imply gold prices falling belowUSD1,100 as US real yields move higher, the US dollar recovers and theS&P500 hits fresh highs.

    Industrial Metals: Copper has been weighed down by China worries and a gainin Shanghai exchange inventory. Attention is now shifting towardsmanufacturing data for March and the National People’s Congress in Beijingnext week. We expect a soft patch of data or an absence of industrial activityrecovery threaten to sustain headwinds for the complex.

    Agriculture: Soybean prices have been supported by South American harvestdelays alongside strong international demand. However, a price correction isnow underway. We expect the recent gains in corn prices may be difficult tosustain given the outlook for a record US crop while the wheat market hasbeen pressured by, among other things, cancelled orders from Egypt.